NTPC (NTPC) 160. Strong core performance. Result Update. ICICI Securities Ltd Retail Equity Research. August 23, 2016

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1 Result Update Rating matrix Rating : Buy Target : 188 Target Period : 12 months Potential Upside : 18% What s Changed? Target Changed from 163 to 188 EPS FY17E Unchanged EPS FY18E Unchanged Rating Unchanged Quarterly Performance Q1FY17 Q1FY16 YoY (%) Q4FY16 QoQ (%) Revenue EBITDA (4) EBITDA (%) (222) PAT (11) Key Financials ( Crore) FY15 FY16 FY17E FY18E Net Sales EBITDA Net Profit EPS ( ) Valuation summary FY15 FY16 FY17E FY18E PE (x) Target PE (x) EV/EBITDA (x) P/BV (x) RoNW (%) RoCE (%) Stock data Particulars Amount Market Capitalisation Crore Debt (FY16) Crore Cash (FY16) 4406 Crore EV Crore 52 week H/L 170/127 Equity capital 8245 Crore Face value 10 Price performance (%) 1M 3M 6M 12M NTPC CESC Tata Power Research Analyst Chirag Shah shah.chirag@icicisecurities.com Strong core performance August 23, 2016 NTPC (NTPC) 160 NTPC reported Q1FY17 results wherein operationally the performance seems to be better than estimates on the sales and EBIDTA front. The company adopted Ind AS accounting in Q1FY17. Net sales after adjustments of prior period sales, electricity duty and income tax adjustments came in ahead of our estimates of crore vs. our estimate of crore EBITDA at crore came in above our estimate of crore mainly on account of lower fuel costs and higher-thanexpected revenues. EBITDA margins came in at 27.8% in Q1FY17 Consequently, adjusted PAT was at 2399 crore, looking optically below our estimate of 2461 crore. This was primarily due to higher interest costs and lower-than-expected other income for Q1FY17 Generation for Q1FY17 was up 10% YoY to billion units (BUs) vs BUs in Q1FY16. The company expects to add 5648 MW of capacity in FY17E Generation up 10% in Q1FY17 on back of improved PLFs NTPC was able to report a strong PLF improvement in Q1FY17 across both coal-based and gas based power plants. PLFs for coal based stations improved from 77.58% in Q1FY16 to 81.35% in Q1FY17 whereas the same for gas based stations improved from 17.83% in Q4FY16 to 26.31% in Q1FY17. Consequently, gross generation was up 10% in Q1FY17 to BUs. Similarly, units sold also grew 10.65% to BUs vs. our estimate of BUs. Tariff per unit came in at 3.12/unit as higher prices of coal (use of better quality of coal, which is a pass through) vs. our estimate of 3.05/unit for Q1FY17. Going ahead, with an increase in capacity over MW in FY17E-18E, we expect energy sold to grow at a CAGR of 6.5% to crore units in FY16-18E. We expect total capacity to reach MW by end of FY18E. NTPC to add over MW of capacity in FY17E-18E NTPC s installed capacity has grown at 5% CAGR in FY For FY16, NTPC added 1960 MW while in FY17E and FY18E, it further expects to add 5648 MW and 5000 MW, respectively. Regulated equity at the same time has grown at a CAGR of 11% in FY12-16 at crore and is expected to further inch up to crore by FY18E. The regulated equity as of Q1FY17 was at crore. Renewables to get greater focus in long term vision of company In its earlier vision till 2032, NTPC aspired to derive 25% of its overall portfolio from renewable energy. Recently, it has revised its vision and now aspires to become the largest renewable energy company in India by 2028 wherein now it expects the share of the same to go up to at least 40%. In FY17E, the company expects to add 768 MW of solar capacity. Reasonable performance to follow; maintain BUY With strong capacity addition targets in FY17E-18E, we expect NTPC s capacity to reach MW in FY18E from MW in FY16. Coupled with this strong focus on renewables, capacity addition in the next five to 10 year, NTPC offers the best play to ride the ongoing solar power boom and recovery in the conventional power sector. Also, it commands a relatively strong balance sheet profile and has enough room to achieve its set milestones, going ahead. We upgrade the target multiple and now value the company at 1.5x its FY18E ABV to arrive at a fair value of 188. ICICI Securities Ltd Retail Equity Research

2 Variance analysis Q1FY17 Q1FY17E Q1FY16 YoY (%) Q4FY16 QoQ (%) Comments Adjusted revenue was better than estimates on account of higher tariff QoQ at 3.12/unit on account of higher fuel costs, which are a pass through Energy sales net 18, , , , Other Income Total Income 18, , , , Fuel 11, , , , Fuel cost per unit was at 1.93/unit on account of a price hike by Coal India and usage of better quality coal G&A 1, , ,215.0 (13.8) 1,581.3 (33.8) Employee expense Total expenses 13, , ,646.9 (0.1) 12, EBITDA 5, , , ,449.1 (3.8) EBITDA Margin (%) bps bps Depreciation 1, , , ,471.0 (5.2) Interest Other Income (47.9) (64.6) Other income was lower-than-expected PBT 3, , , ,562.3 (12.8) Total Tax (17.3) Adjusted PAT 2, , , ,707.5 Revenue and EBITDA beat were marred by lower-than-expected other (11.4) income and higher interest costs. Quality of PAT improved Key Metrics Generation (Crore units) 6, , , , Generation was up 10.6% YoY on account of higher PLFs Sales (Crore units) 6, , , , Tariff rate ( /Kwh) (4.7) Change in estimates FY17E FY18E ( Crore) Old New % Change Old New % change Comments Revenue 76, ,532.5 (0.0) 81, , Estimates have come down on account of lower fuel costs, which are pass though for the company EBITDA 21, ,084.7 (0.0) 22, , EBITDA Margin (%) bps bps PAT 10, , , , EPS ( ) (0.2) (0.2) Assumptions Current Earlier Comments Crore units FY16 FY17E FY18E FY17E FY18E Generation 24, , , , ,444.8 Generation growth driven by capacity addition Sales 22, , , , ,523.7 Tariff rate ( /Kwh) ICICI Securities Ltd Retail Equity Research Page 2

3 Q1FY17 result and conference call highlights Gross generation for Q1FY17 stood at 64.5 BUs vs BUs in Q1FY16 and 62.3 BUs in Q4FY16 Plant availability factor (PAF) for coal based stations was 90.45% in Q1FY17 vs % YoY, 95.24% QoQ. PAF for gas-based stations was 92.63% in Q1FY17 vs % YoY and 98.2% QoQ However, the plant load factor (PLF) for coal-based stations improved in Q1FY17 to 81.3% vs % YoY. PLF across gasbased plants was at 26.31% vs % QoQ The regulated asset base of the company was at crore as of Q1FY17 vs crore in Q4FY16 NTPC received 40.3 MMT of domestic coal in Q1FY17 vs MMT in Q1FY16. Imported coal quantity declined 86% YoY to 0.56 MMT vs MMT in Q1FY16 NTPC s current group capacity is at MW. The projects to be commissioned during FY17 include Kudgi 1600 MW, Lara 800 MW, Solapur 660 MW, Mauda 660 MW and Bongaigaon 250 MW while 768 MW of solar capacity will also be commissioned during the same period For FY17, NTPC is expected to incur a capex of crore on a standalone basis. Capex done in Q1FY17 was at 5538 crore for the standalone business while for the JV capex done was 1182 crore Exhibit 1: Trend in generation (million units) 70,000 Gross Generation 60,000 50,000 40,000 MUs 30,000 20,000 10,000 - Q2 FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 ICICI Securities Ltd Retail Equity Research Page 3

4 Company Analysis Capacity addition to continue to drive future earning NTPC s installed power capacity has grown at 5% CAGR in FY13-16 to 44.4 GW. We expect the same to increase to 5.4% CAGR in FY16-18E to 52.8 GW capacity. The growth in tariff realisation over the same period has been at a CAGR of 2.4% to 3.2 in FY16, which is among the lowest in the country as it is based on CERC regulation, thus lowering the risk of backdown by SEB. With assured fuel linkages and offtake agreement for existing and upcoming capacity, NTPC is least impacted by current sectoral woes. Accordingly, NTPC has managed to maintain better PLF and PAF over the years. Going ahead, we expect NTPC s generation at 6.4% CAGR in FY16-18E while revenues and PAT are expected at crore and crore in FY18E, respectively. Exhibit 2: Generation and revenue trend (Crore) ,830 65,674 69,650 73, FY10 FY11 FY12 FY13 FY14 FY15 Revenue Exhibit 3: Trend in profitability in FY16-18E ( Crore) 11,000 10,773 10,543 10,500 10,200 10,000 9,386 9,500 9,000 8,500 FY15 FY16 FY17E FY18E Exhibit 4: Trend in PAF (%) Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Coal - PAF (%) Gas - PAF (%) Exhibit 5: Trend in PLF (%) Q1 FY12 Q2 FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Coal - PLF (%) Gas - PLF (%) ICICI Securities Ltd Retail Equity Research Page 4

5 Capacity addition programme; solar on radar In the Twelfth Five Year Plan, we expect NTPC to add 13,058 MW capacity, of which ~7,200 MW of capacity (55.8% of target) has already been added. For FY15, NTPC added only 1,595 MW due to execution delays across Koldam, Bongaigaon and Barh. For FY16, NTPC added 1960 MW and another 5648 MW & 5000 MW in FY17E and FY18E, respectively. Apart from these, NTPC plans to add 10,000 MW of solar capacity in the next seven or eight years. The work on the first tranche of 3000 MW has already begun and the company plans to commission 1,000 MW of this capacity in Andhra Pradesh. The company has already completed work on 250 MW of capacity while tender for another 750 MW will be floated in the coming month. NTPC plans to commission 3000 MW of capacity by In FY17, NTPC will add 768 MW of solar capacity. Exhibit 6: Total MW projects under construction Projects Capacity (MW) Coal based Barh-I 1980 Bongaigaon 750 Barh II 660 Solapur 1320 Mouda-II 1320 Vindhyachal-V 500 Kudgi 2400 Lara 1600 Gadarwara 1600 Total - Coal based Hydro Tapovan Vishnugadh 520 Lata Tapovan +Singrauli 179 Total - Hydro 699 Renewable Projects Unchacha Solar 10 Ramagundam 10 Talcher 10 Faridabad 5 Rajgarh Solar 50 Total - Renewable 85 Projects under JVs/Subsidiaries Nabinagar-JV with Railways 1000 Nabinagar (JV with BSEB) 1980 Muzaffarpur expansion 390 (MTPS)-JV with BSEB Meja (JV with UPRVUNL) 1320 Total - Project under JVs/ Subsidiaries 4690 Total ICICI Securities Ltd Retail Equity Research Page 5

6 Cancelled coal blocks re-allotted to NTPC The government has re-allocated the five coal blocks to NTPC, which were cancelled post the Supreme Court s verdict. With this, the company now has 10 coal blocks under its belt with a reserve of ~5 billion tonnes and peak production capacity of ~20 MMT by FY19E. Of this, only Pakri Barwadih is ready to start production. The company expects to extract 2 MT of coal in FY18E from this block. The remaining blocks would take another four or five years for development. Due to the capacity ramp, the company would need ~218 MTPA of coal by FY17E compared to the current requirement of 198 MTPA. The company has already spent 3380 crore towards coal mining capex. Exhibit 7: Fuel requirement in Twelfth Five Year Plan (%) FY14 FY15 FY16 FY17E ACQ+LOA E-Auction +MoU Captive Mines Domestic Deficit(Imported) ICICI Securities Ltd Retail Equity Research Page 6

7 Outlook and valuation With strong capacity addition targets in FY17E-18E, we expect NTPC s capacity to reach MW in FY18E from MW in FY16. Coupled with this strong focus on renewables, capacity addition in the next five to 10 year, NTPC offers the best play to ride the ongoing solar power boom and recovery in the conventional power sector. Also, it commands relatively a strong balance sheet profile and has enough room to achieve its set milestones, going ahead. We upgrade the target multiple and now value the company at 1.5x its FY18E ABV to arrive at a fair value of 188. Exhibit 8: Trend in regulated equity ( crore) FY10 FY11 FY12 Q1FY13 Q2FY13 Q3FY13 FY13 FY14 FY15 FY16 Q1FY17 ICICI Securities Ltd Retail Equity Research Page 7

8 Recommendation history vs. Consensus ( ) Aug-14 Oct-14 Jan-15 Mar-15 Jun-15 Aug-15 Oct-15 Jan-16 Mar-16 Jun Aug-16 (%) Source: Bloomberg, Company, ICICIdirect.com Research Series1 Idirect target Consensus Target Mean % Consensus with Buy Key events Date Feb-10 May-10 Jan-11 Feb-12 Aug-12 Feb-13 Mar-13 Dec-13 Feb-14 Sep-14 Mar-15 Mar-15 Jun-16 Event GoI divests its 5% stake in the company by launching an FPO on February 3, 2010, which though got fully subscribed (1.2x), received a poor response from foreign players. The FPO price was fixed at 201/share and 8,286 crore was raised by the government NTPC conferred Maharatna status by the Union Government of India Ansaldo approaches the Delhi High Court seeking relief against their disqualification by NTPC as the latter was disqualified during techno commercial evaluation for its (11x660 MW boiler package tender) Supreme Court disqualifies Ansaldo's plea and rules in favour of NTPC, which later opened a price bid for its (8x800 MW) BTG order where BGR emerged as a L1 bidder followed by Bhel and Toshiba NTPC announces plans to sell $1 billion of bonds overseas for capacity expansion GoI divests 9.5% of its stake in the company by offering crore shares at a minimum price of 145/share through offer for sale (OFS) route NTPC adds highest ever capacity of 4,170 MW (vs. target of 4,160 MW for FY13). With this, NTPC became a 41,000 MW plus company CERC proposes a stringent draft tariff order. If it gets implemented that would have a negative impact on NTPC's earnings, going ahead CERC issues final tariff order for , which was slightly more stringent than the draft proposal Supreme Court orders cancellation of all coal blocks allotted between 1993 and Consequently, NTPC loses five coal blocks and is left with only five blocks NTPC issues 10,306 crore debenture bonus Government re allocates cancelled coal blocks to NTPC After many quarters of tepid growth, NTPC achieves 10% generation growth on the back of improvement in PLF's. Going ahead the company expects to add over MW of capacity over FY17-FY18. NTPC plans to spend crore of capex in FY17E Top 10 Shareholders Rank Investor Name Latest Filing Date % O/S Position Position Change 1 Government of India 13-Jul ,750.8 (17.6) 2 Life Insurance Corporation of India 30-Jun , T. Rowe Price International (UK) Ltd. 30-Jun (0.1) 4 ICICI Prudential Asset Management Co. Ltd. 30-Jun (2.3) 5 The Vanguard Group, Inc. 30-Jun BlackRock Institutional Trust Company, N.A 31-Jul BlackRock Asset Management North Asia L 31-Jul HSBC Global Asset Management (Hong Kon 30-Nov (0.1) 9 Birla Sun Life Asset Management Company 31-Jul (0.0) 10 SBI Funds Management Pvt. Ltd. 30-Jun Source: Reuters, ICICIdirect.com Research Recent Activity Buys Shareholding Pattern (in %) Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Promoter FII DII Others Sells Investor Name Value (US$) Shares Investor Name Value (US$) Shares BlackRock Asset Management North Asia Limited Government of India BlackRock Institutional Trust Company, N.A T. Rowe Price Hong Kong Limited SBI Funds Management Pvt. Ltd CI Investments Inc Amundi Asset Management DSP BlackRock Investment Managers Pvt. Ltd M & G Investment Management Ltd ICICI Prudential Asset Management Co. Ltd Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 8

9 Financial summary Profit and loss statement Crore (Year-end March) FY15 FY16 FY17E FY18E Total operating Income 73,358 70,507 76,532 81,876 Growth (%) 8 (4) 9 7 Raw Material Expenses 48,845 43,793 45,399 48,577 Employee Expenses 3,686 3,609 3,898 4,210 Other expenses 4,645 5,591 6,150 6,765 Total Operating Expenditure 57,176 52,994 55,448 59,553 EBITDA 16,181 17,513 21,085 22,323 Growth (%) (5) Depreciation 4,912 5,425 6,107 6,534 Interest 2,744 3,230 4,198 4,492 Other Income 2,740 1,189 2,000 2,500 PBT 11,266 10,047 12,780 13,797 Others 1,233 1,233 (104) 0 Total Tax 2,208 (184) 2,236 2,345 PAT 9,058 11,464 10,543 11,451 Adjusted PAT 9,058 9,386 10,543 11,451 Growth (%) (17) EPS ( ) Cash flow statement Crore (Year-end March) FY15 FY16 FY17E FY18E Profit Before Tax 10,291 10,127 10,543 11,451 Add: Depreciation 4,912 5,425 6,107 6,534 (Inc)/dec in Current Assets (2,396) (3,975) (7,970) (3,661) Inc/(dec) in CL and Provisions (5,618) 1,350 (4,218) 821 Others 2,744 3,230 4,198 4,492 CF from operating activities 9,932 16,158 8,660 19,637 (Inc)/dec in Investments 4,491 9,404 3,816 0 (Inc)/dec in Fixed Assets (21,100) (14,945) (14,950) (10,000) Others CF from investing activities (16,609) (5,540) (11,132) (9,997) Issue/(Buy back) of Equity Inc/(dec) in loan funds 16,127 7,850 8,638 11,403 Dividend paid & dividend tax (4,296) (4,296) (3,207) (3,338) Inc/(dec) in Sec. premium Others (2,744) (3,230) (4,198) (4,492) CF from financing activities 9, ,414 1,102 Net Cash flow 2,410 10,944 (1,059) 10,742 Opening Cash 15,311 12,878 24,909 23,536 Closing Cash 12,878 24,909 23,536 36,458 Balance sheet Crore (Year-end March) FY15 FY16 FY17E FY18E Liabilities Equity Capital 8,245 8,245 8,245 8,245 Reserve and Surplus 73,412 80,332 87,538 95,363 Total Shareholders funds 81,657 88,578 95, ,609 Total Debt 78,532 86,383 95, ,424 AAD 1,394 1,947 1,947 1,947 Minority Interest / Others 979 1,152 1,152 1,152 Total Liabilities 162, , , ,131 Assets Gross Block 138, , , ,995 Less: Acc Depreciation 46,163 51,589 57,695 64,229 Net Block 91, , , ,766 Capital WIP 37,487 28,822 25,006 25,006 Total Fixed Assets 129, , , ,771 Investments 9,032 8,293 10,293 12,293 Inventory 7,453 7,193 8,317 8,933 Debtors 7,604 7,844 9,160 9,801 Loans and Advances 17,935 19,229 21,373 22,869 Other Current Assets 6,888 9,590 12,977 13,885 Cash 12,878 24,909 23,536 36,458 Total Current Assets 52,759 68,765 75,363 91,946 Creditors 5,953 5,503 3,327 3,573 Other Liabilities 9,925 10,715 7,763 8,337 Provisions 8,874 9,096 9,096 9,096 Total Current Liabilities 24,753 25,314 20,186 21,007 Net Current Assets 28,007 43,451 55,177 70,939 Others Assets Application of Funds 162, , , ,131 Key ratios (Year-end March) FY15 FY16 FY17E FY18E Per share data ( ) EPS Cash EPS BV DPS Cash Per Share Operating Ratios (%) EBITDA Margin PBT / Total Operating income PAT Margin Inventory days Debtor days Creditor days Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) P/E EV / EBITDA EV / Net Sales Market Cap / Sales Price to Book Value Solvency Ratios Debt/EBITDA Debt / Equity Current Ratio Quick Ratio ICICI Securities Ltd Retail Equity Research Page 9

10 ICICIdirect.com coverage universe (Utilities) ( ) TP( ) Rating ( Cr) FY15 FY16 FY17E FY15 FY16 FY17E FY15 FY16 FY17E FY15 FY16 FY17E FY15 FY16 FY17E NHPC (NHPC) Hold 29, NTPC (NTPC) Buy 131, Power Grid (POWGRI) Buy 94, PTC India (POWTRA) Hold 2, CESC (CESC) Buy 8, Tata Power (TATPOW) Hold 20, ICICI Securities Ltd Retail Equity Research Page 10

11 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 11

12 ANALYST CERTIFICATION We /I, Chirag Shah PGDBM research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: ICICI Securities Limited is a Sebi registered Research Analyst having registration no. INH ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. 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