NTPC Ltd. Electric Utilities INITIATING COVERAGE BUY. July 23, 2015

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1 NTPC Ltd. NTPC Ltd. (NTPC) is a state owned enterprise with Maharatna status, incorporated in 1975 for the development of power sector in India. Since then the company has emerged as the dominant player in the power sector having presence across the power generation value chain. Most efficient and Market Leader in the Power Generation Space: As on 31st Mar. 2015, NTPC group had a market share of 16.3% (in terms of installed capacity). During FY15, the company generated 241.2bn units as against all India power generation of 1,048.4bn, translating into a market share of 23%. Moreover, despite fuel security concerns for the sector, NTPC s plant has consistently operated at higher utilization levels as compared to the sector. During FY15, the company s coal plant operated at higher plant load factor (PLF) of 80.2% as compared to all India thermal PLF of 64.5%. In Q1 FY16, NTPC s coal plant operated at a PLF of 80.4% v/s all India thermal PLF of 69.7%. Stable Business Model: NTPC operates under a regulated business model, earning 15.5% return on equity (RoE) on its investments. The company has almost tied up the entire output from the power plant with its customers through a power purchase agreement (PPA) with a price escalation clause. Pursuant to this, NTPC is able to pass on the increased cost of power production to its customer. Forecast a Capacity Addition of 4.5GW over FY16-17: We are expecting a capacity addition of 2,403MW and 1,850MW in FY16E and FY17E, respectively. During the same period, NTPC is expected to commercialize 45,501MW and 47,851MW, respectively. Residual capacity of 4,830MW of 12th five year plan is likely to slip for next five year plan i.e. 13th five year plan. The company has also planned a capacity addition for 12,321MW for 13th five year plan. Not Impacted by the poor financial position of SEBs: As per the tariff determination guidelines by the sector regulator Central Electricity Regulatory Commission (CERC) for the period FY15-19, NTPC s power plants are entitled for performance incentive if operated on a PLF level above 85%. Moreover, the power plants can claim fixed cost recovery, if the plant availability factor (PAF) is 83% and above. NTPC is able to recover full fixed cost as its plant operated at PAF level above 83% levels. With the revival in the economic activities, we expect PLF level to increase gradually to 82% levels in FY17E Improved visibility of fuel security for coal based power plants: NTPC has entered into a fuel supply agreement (FSA) with Coal India Ltd. (CIL) and The Singareni Collieries Company Ltd. (SCCL) for the supply of coal for period of 20 years for the power plants installed prior to FY09. Moreover, the company has signed new FSAs for the power plants with a capacity of 9,600MW installed between FY10-FY15. In FY15, NTPC has been allotted nine captive coal blocks with reserves of over 5.7bn tonnes, which are in different stages of development and are anticipated to start production by FY17 end. Valuation: NTPC has a regulated business model with high certainty in cash flow generation. Moreover, the company is in better financial position to fund its future capacity expansion. At CMP of Rs , NTPC is trading at a P/E multiple of 13.5x and 9.7x to its FY16E and FY17E earnings, respectively, which we feel is inexpensive taking into consideration its project addition schedule, profitability and RoE of 10-13%. Based on a P/E multiple of 12x to its FY17E earnings, we arrive at a target price of Rs. 169 per share, reflecting a return of 23%. Thus we recommend a rating on the stock. Rajnath Yadav Board line: ; Ext. 975 rajnath.yadav@choiceindia.com Rating Matrix CMP (Rs.) 137 Rating Relative Capital Market Strength Buy Target price (Rs.) 169 Target period 12 months Upside potential 23% 52 week H/L (Rs.) / Face value (Rs.) 10 Category Sector Large Cap Shareholding Pattern as on 30th June 2015 Particulars Jun-15 Mar-15 Sep-14 Jun-14 Promoters 75.0% 75.0% 75.0% 75.0% FIIs 10.0% 10.3% 10.4% 10.4% DIIs 12.7% 12.3% 12.1% 11.8% Non institutions 2.3% 2.4% 2.5% 2.8% Financial Snapshot (Rs. bn) Projections FY12 FY13 FY14 FY15 FY16E FY17E Revenue EBITDA Adjusted PAT EBITDA (%) 22.6% 26.0% 24.7% 22.0% 23.3% 25.0% PAT (%) 14.9% 16.6% 15.2% 14.0% 11.5% 13.6% EPS BVPS RONW (%) 13.1% 14.2% 13.2% 12.3% 9.9% 12.6% P/E P / BVPS NTPC Ltd. Sensex 1

2 Company Introduction: NTPC Ltd. (National Thermal Power Corporation Ltd.) is a state owned enterprise with Maharatna status, incorporated in 1975 for the development of power sector in India. Over the period, the company has emerged as the dominant player in the power sector having presence across the power generation value chain through backward and forward integration. Apart from thermal power generation, NTPC has presence in the power generation via hydro, nuclear & renewable energy sources, coal mining, power equipment manufacturing, power trading and distribution. As of 20th July, 2015, on a group level, NTPC had an installed power generation capacity of 45,048MW and total commercial capacity of 43,943MW. Group level installed and commercial power generation capacity includes capacities from various joint ventures. 47,000 45,000 43,000 41,000 39,000 37,000 35,000 Installed power generation capacity (MW) as on 20th July ,882 41,273 37,127 43,108 44,398 38,202 38,852 45,048 FY13 FY14 FY15 FY16 (YTD) Installed Capacity (NTPC - Standalone, MW) Installed Capacity (NTPC - Group, MW) 45,000 43,000 41,000 39,000 37,000 35,000 33,000 Commercialized Power Generation Capacity (MW) as on 20th July ,882 39,273 36,447 41,948 37,142 43,143 37,942 43,943 FY13 FY14 FY15 FY16 (YTD) Commercialized Capacity (NTPC - Standalone, MW) Commercialized Capacity (NTPC - Group, MW) Diversified Fuel Mix: NTPC is primarily into thermal power generation with coal and gas based power plants constituted 84.7% and 13.3%, respectively, to the group level installed capacity. During FY16, the company ventured into hydro power generation with a power generation capacity of 800MW. Additionally, NTPC has 110MW solar power capacity. By 2032, the company is planning to have a power generation capacity of 1,28,000MW. Coal and gas based power plant are likely to expand by 3.8% and 7.5% CAGR over FY15-32, respectively. Over the same period, renewables and hydro power capacities to expand by 31.5% and 16.2%, respectively. As a result, by 2032, around 28% of the NTPC s installed capacities to be on non-fossil fuels. Diversified Fuel-mix (as on 20th July 2015) Anticipated fuel-mix in % 0.2% 13.3% 11% 9% 8% 84.7% 16% 56% Coal Power Plant Hydro Power Plant Gas Power Plant Solar Power Plant Coal Power Plant Nuclear Power Plant Gas Power Plant Renewable Power Plant 2

3 Company Introduction (Contd ) Revenue Profile: As on FY15 end, the company derives the revenue from two segments, namely, the Generation and the Others. The primary business of the company is generation and sales of power, while, the Others segment includes consultancy services, project management and supervision, oil and gas exploration and coal mining Revenue Profile (At the end of FY15) 0.2% 99.8% Generation Others Power Sector Overview: Infrastructure is one of the key drivers of the Indian Economy and thus it is given a high priority during the formulation of the policies. Investment in infrastructure is directly correlated to the national GDP, as sectors involved in infrastructure industry are roads, power telecom, railway, ports, airports etc. As Indian economy is anticipated to grow at higher rate, the government is expecting huge investments in these sectors. The government is focusing to provide affordable, 24x7 power to all households by This has resulted into accelerated capacity addition by the power generators. For 12th five year plant the government has increased the investment in infrastructure to Rs. 51.5tn, representing an increase by 2.6 times as compared to 11th plan. Power sector is the major contributor towards total infrastructure spending, followed by roads, telecommunication and railways sector in 11th plan. 3.1% 1.4% 8.9% Revenue Profile (At the end of FY15) 15.7% 35.9% 17.1% 17.9% Electricity Roads Telecommunications Railways Ports Airports Others 3

4 Sector Overview (Contd ) Earlier the sector was dominated by few central and state utilities, however, since last decade many private players have ventured and increased their market share and competition. The power developers have large capacity expansion plans for the future. The rate of capacity addition has risen from ~4GW during to ~9GW during Taking into consideration the governments focus, it is expected that the sector will sustain the capacity addition in 12th and 13th plan. Below are the key critical requirements for future growth of the sector: Improvement in the power transmission network and capacity expansion Reduction in the transmission and distribution losses Improving the financial health of SEBs Enhancing the fuel security Fast approvals in the regulatory requirements such as environmental clearance, forest clearance, water availability etc. Land availability and ease in land acquisition process Coal Demand Supply Equation in India: At the end of 11th five year plan, coal based power plant formed 56.5% of the national power generation capacity. To meet the supply-demand mismatch, power companies have resorted to coal import in the past. Below is the national coal demand-supply position in India. National Coal Demand-Supply Position Particular (mn tonnes) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E Coal India SCCL Others Total Domestic Supply Coal Imports Total Domestic Demand Coal Import Bill FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E Coal Import Bill (USD bn) Coal Import Cost per Tonne (USD) Coal Import Bill (Rs. bn) ,082.4 USD/INR Rate To address the fuel constraints face by the power developer, the government has recently concluded e-auction of 29 coal mines in two phases. Moreover, the government has enhanced the coal availability in India by addressing the production bottleneck faced by the coal miners in India. The government is aggressively focusing on achieving the coal production target of 1.5bn tonnes by The government has planned a power capacity addition of 75.7GW in 12th five year plan over FY Major part of the expansion is expected to come from 62.6GW addition of coal based thermal power plant. By FY17, India s national coal demand is expected to touch to around 980mn tonnes, of which demand from power sector is expected to be around 700mn tonnes. With indigenous coal availability projected at around 800mn tonnes, the power companies will continue to depend on the imports. The coal ministry is undertaking certain steps such as expediting contract mining, faster regulatory clearance & land acquisition, improving infrastructure at coalfields, modernization of mines etc. to reduce the coal import by increase the coal production coupled with the expansion in the evacuation capacity. 4

5 Investment Rationale: 1) Most efficient and Market Leader in the Power Generation Space: As on 31st Mar. 2015, NTPC group had an installed capacity of 44,398MW as against an all India installed capacity of 271,722MW, translating into a market share of 16.3%. Moreover, the company had a market share of 23.2% in the all India thermal capacity. On power generation front, NTPC is far more efficient in the sector. Despite having lower share in the all India installed capacity, the company generated 241.2bn units as against all India power generation of 1,048.4bn, translating into a market share of 23%. Installed Capacity Market Share by the End of FY15 NTPC's Share in All India Power Generation 16.3% 23.0% 83.7% 77.0% Others Players NTPC Others Players NTPC Its highly efficient power plant operations have mainly led to such distinction and dominance in the Indian power sector. Despite fuel security concerns for the sector, NTPC s plant has consistently operated at higher utilization levels as compared to the sector. During FY15, the company s coal plant operated at higher PLF of 80.2% as compared to all India thermal PLF of 64.5%. In Q1 FY16, NTPC s coal plant operated at a PLF of 80.4% v/s all India thermal PLF of 69.7%. 2) Stable Business Model: NTPC operates under a regulated business model, earning 15.5% RoE on its investments. The company has almost tied up the entire output from the power plant with its customers through a PPA with a price escalation clause. Pursuant to this, NTPC is able to pass on the increased cost of power production to its customer. 3.5 Power Tariff and Fuel Cost (Rs.) FY13 FY14 FY15 FY16E FY17E Average Tariff (Rs. per Unit) Average Fuel Cost (Rs. per Unit) 5

6 Investment Rationale (Contd ) NTPC Ltd. The company normally finances its power projects on 70:30 debt equity ratio. As on FY15 end, NTPC had a standalone regulated equity of Rs. 369,162.7mn, which is expected to increase by 9.9% CAGR over FY15-17E to Rs. 445,683.1mn. RoE for FY16E is expected to decline as compared to FY15 on account of back down by the state electricity board (SEBs) for the offtake of power. However, with anticipated rebound in economic activity in H2 FY16, NTPC is likely to post an increase in the RoE. 500,000 Regulated Equity (Rs. mn) and Core RoE (%) 30% 450, , , , % 272, % 325, , , % 20.1% 401, % 445, % 25% 20% 15% 250,000 FY12 FY13 FY14 FY15 FY16E FY17E Regulated Equity (Rs. mn) Core RoE (%) 10% 3. Forecast a Capacity Addition of 4.5GW over FY16-17: After taking into consideration the developments across each projects, we are expecting a capacity addition of 2,403MW and 1,850MW in FY16E and FY17E, respectively, as against NTPC s target of 2,255MW and 4,170MW during the same period. The company is likely to have an installed capacity of 46,801MW and 48,651MW by the end of FY16E and FY17E. During the same period, NTPC is expected to commercialize 45,501MW and 47,851MW, respectively. 2,500 2,300 2,100 1,900 1,700 1,500 Capacity Addition and Commercialization Schedule 2,403 2,358 2,350 1,850 FY16E FY17E Commissioning of Power Capacity (MW) Commercialization of Power Capacity (MW) 50,000 45,000 40,000 35,000 Group Installed and Commercial Capacity (MW) 41,273 39,273 43,108 41,948 44,398 43,143 46,801 45,501 48,651 47,851 FY13 FY14 FY15 FY16E FY17E Group Installed Capacity (MW) Group Commercial Capacity (MW) Residual capacity of 4,830MW of 12 th five year plan is likely to slip for next five year plan i.e. 13 th five year plan. Additionally, the company has planned a capacity addition for 12,321MW for 13 th five year plan. 6

7 Investment Rationale (Contd ) Status of Future Coal Mining Projects Sr. No. Project Name Capacity (MW) Residual Capacity (MW) Technology Land Acquisition Water Fuel Forest Clearance Environment Clearance Financial Closure Expected Date of Commissioning Standalone Coal Based Power Projects 1 Bongaigaon, Assam (3 X 250) Sub Critical FY16, FY17 2 Barh-I, Bihar (3 X 660) 1,980 1,980 Super Critical FY16, FY17 3 Barh-II, Unit V, Bihar (1 X 660) Super Critical FY17 4 Lara-I, Chattisgarh (2 X 800) 1,600 1,600 Super Critical Beyond FY17 5 North Karanpura, Jharkhand (3 X 660) 1,980 1,980 Super Critical Beyond FY17 6 Kudgi - I, Karnataka (3 X 800) 2,400 2,400 Super Critical FY16, FY17 and FY18 7 Gadarwara-I, Madhya Pradesh (2 X 800) 1,600 1,600 Super Critical Beyond FY17 8 Vindhyachal - V, Madhya Pradesh (1 X 500) Sub Critical FY16 9 Mouda-II, Maharashtra 1,320 1,320 Super Critical FY17 10 Solapur, Maharashtra (2 X 660) 1,320 1,320 Super Critical FY17 11 Darlipalli, Odisha (2 X 800) 1,600 1,600 Super Critical Beyond FY17 12 Unchahar, Uttar Pradesh Beyond FY17 Total 16,210 15,960 Hydro Electric Power Projects 1 Tapovan Vishnugad, Uttarakhand Beyond FY17 2 Lata Tapovan, Uttarakhand Beyond FY17 3 Singrauli CW Discharge (Hydro), Uttar Pradesh 8 8 FY16 Total Solar Energy Power Projects 1 Anantpur Solar PV, Andhra Pradesh (5 X 50) FY17 Total Coal Based Projects under JVs & Subsidiaries 1 Nabinagar- JV with Railways, Bihar (4 X 250) 1,000 1,000 Sub Critical FY16, FY17 and FY18 2 Muzaffarpur Expansion (MTPS) JV with BSPGCL, Bihar (2 X 195) Sub Critical FY16 3 Nabinagar, JV with BSPGCL, Bihar 1,980 1,980 Super Critical Beyond FY17 4 Meja, JV with UPRVUNL, Uttar Pradesh (2 X 660) 1,320 1,320 Super Critical Beyond FY17 Total 4,690 4,495 Total On-Going Projects 21,849 21, Not Impacted by the poor financial position of SEBs: As per the tariff determination guidelines by the sector regulator CERC for the period FY15-19, NTPC s power plants are entitled for performance incentive if operated on a PLF level above 85%. Moreover, the power plants can claim fixed cost recovery, if the plant availability factor (PAF) is 83% and above. Since the last couple of years, despite significant power demand, SEBs are not purchasing costly power, mainly due to their poor financial position. As a result, the company was not able to maintain the required PLF level, which has resulted into lower incentive income. However, NTPC is able to recover full fixed cost as its plant operated at PAF level above 83% levels. With the revival in the economic activities, we expect PLF level to increase gradually to 82% levels in FY17E. 7

8 Investment Rationale (Contd ) NTPC Coal PLF and PAF (%) 93% 89.5% 87.6% 91.8% 88.6% 89.4% 89.3% 87% 81% 85.0% 83.1% 81.5% 80.2% 82.0% 76.5% 75% FY12 FY13 FY14 FY15 FY16E FY17E Coal PLF (%) Coal PAF (%) 5. Improved visibility of fuel security for coal based power plants: NTPC has entered into a fuel supply agreement (FSA) with CIL and SCCL for the supply of coal for period of 20 years for the power plants installed prior to FY09. Annual contracted quantity (ACQ) for these power plants is estimated to be around 125mn tonnes, equivalent to 90% of the total requirement. Moreover, the company has signed new FSAs for the power plants with a capacity of 9,600MW installed between FY10-FY15. As per new FSAs, NTPC is entitled for ACQ of around 40mn tonnes, equivalent to 80% of the PLF. To meet the residual requirement the company frequently imports coal. Additionally, NTPC has been allotted nine captive coal blocks with reserves of over 5.7bn tonnes and annual production potential of 100mn tonnes. These coal blocks are at different stages of development and are anticipated to start production by FY17 end. Status of Future Coal Mining Projects Sr. No. Project Name Reserves (mn tonnes) Mining Capacity per Year (mn tonnes) Mining Plan Approval Land Acquisition Environmental Clearance Forest Clearance Appointment of MDO 1 Pakri-Barwadih 1, In Process 2 Chatti-Bariatu Completed 3 Kerandari In Process 4 Talaipalli 1, In Process 5 Dulanga In Process 6 Banai x x x x Under Development 7 Bhalumuda x x x x Under Development 8 Chandrabila x x x x Under Development 9 Kudanali-Luburi x x x x Under Development Total 5,

9 Quarterly and Financial Performance: Recent Quarter Analysis: Despite adding 1,195MW of the commercial generation capacity in Q4 FY15 over same quarter last year, NTPC reported 2.1% drop in gross generation, which was due lower demand from SEBs. Despite having robust demand, SEBs was not in a position to take power from the grid, mainly due to their poor financial position. This has led to lower utilization of coal based power plants with NTPC reporting almost 6ppt decline in PLF level to 82.7%, however this was far above the national coal PLF of 62.6%. Energy sales volume stood at 57,385mn units, representing a decline of 1.7% Y-o-Y, this coupled with 2.9% Y-o-Y fall in average tariff, standalone top-line declined by 8.2% Y-o-Y to Rs. 193,145.8mn. On the back of 13.3% Y-o-y decline in fuel cost, the company reported 11% Y-o-Y fall in total operating expenditure. Accordingly, EBITDA increased by 2.1% Y-o-Y to Rs. 46,490.9mn, with a 242bps expansion in EBITDA margin. High generation capacity resulted to higher depreciation (up 15.2%) and interest charge (up 24.6%). Effective tax incidence declined by 240bps to 5.7%. Consequently, reported net profit 4.8% Y-o-Y to Rs. 29,440.3mn. Net Profit margin expanded by 54bps Y-o-Y to 15.2% Quarterly Financial Performance Quarterly Operational Performance 220, , % 24.1% 210, , % 19.3% 19.4% 193, , , , , % 167, , % 16.3% 15.2% 160, % 150,000 Q4 FY14 Q1 FY15 Q2 FY15 Q3 FY15 Q4 FY15 Total Operating Income EBITDA Margin (%) PAT Margin (%) 24% 22% 20% 18% 16% 14% 12% 10% 45,000 44,000 43,000 42,000 41, % 88.7% 43, % 91.0% 43,128 43,128 43, % 41,948 41, % 41, % 42, % 97.2% 44,398 43, % Q4 FY14 Q1 FY15 Q2 FY15 Q3 FY15 Q4 FY15 Group Installed Capacity (MW) Group Commercial Capacity (MW) Coal PLF (%) Coal PAF (%) 100% 90% 80% 70% Recent Annual Result Analysis: For full fiscal FY15, NTPC reported 1.7% increase in top-line to Rs. 732,460.5mn, driven by 3.4% increase in power sales volume to 224,918mn units. However, average tariff declined by 0.6% to Rs per unit. Higher sales volume was due to 1,195MW addition in commercialized capacity. NTPC installed capacity increased by 1,290MW to 44,398MW. NTPC coal PLF declined by 130bps to 80.2%, which was better as compared to all India Coal PLF level of 64.5%. Total operating expenditure increased by 5.4%, mainly due to higher fuel cost. Standalone EBITDA declined by 9.6% to Rs. 160,856mn, with 274bps contraction in EBITDA margin as compared to FY14. Higher capacity led to increase in depreciation (up 18.6%) and interest charge (up 14%). However due to lower effective tax rate, the company reported 6.2% fall in net profit with 119bps contraction in net profit margin. 9

10 Quarterly and Financial Performance (Contd ) Annual Financial Performance Annual Operational Performance 900, , % 26.0% 24.7% 22.0% 853, % 25.0% 30% % % 88.6% 87.5% 87.5% 100% 90% 700, , % 656, , , , % 724, % 14.0% 11.5% 13.6% FY12 FY13 FY14 FY15 FY16E FY17E Total Operating Income EBITDA Margin (%) PAT Margin (%) 20% 10% % 81.5% % 76.5% 81.3% 2.2 FY13 FY14 FY15 FY16E FY17E Average Tariff (Rs. per Unit) Average Fuel Cost (Rs. per Unit) NTPC Coal PLF (%) NTPC Coal PAF (%) 80% 70% Expectations for FY16E and FY17E: For FY16Eand FY17E, we expect NTPC to commercialize 2,358MW and 2,350MW of the generation capacity. However we anticipate continued back down by the SEBs in FY16E, thereby leading to lower demand of electricity for the company. For FY16E, coal PLF is likely to decline to 76.5% as compared to FY15, but with the anticipated revival in economic activity in H2 FY16E, coal PLF is expected to increase in FY17 to 81.3%. Electricity sales volume is likely to be at 233.6bn and 265.1bn units in FY16E and FY17E, respectively. Average realization to increase by 2.3% CAGR over FY15-17E, while average fuel cost to increase by 1.1% CAGR during the same period. As a result, standalone total operating income to decline by 1.1% in FY16E and increase by 17.9% in FY17E. EBITDA to increase by 4.7% in FY16E to Rs. 168,491.3mn and 26.7% in FY17E to Rs. 213,442.5mn. During the same period, EBITDA margin to expand by 115bps and 123bps, respectively, mainly due to lower fuel cost. Depreciation and finance charge to increase due to increase in generation capacity. In FY16E, reported PAT is expected to decline by 18.7% Y-o-Y to Rs. 83,632.2mn, mainly due to higher effective tax rate of 20% as compared to 2.4% in FY15. Reported PAT for FY17E to increase by 13.6% to Rs. 116,407.8mn as compared to FY15. Risk and Concerns: 1. Disinvestment overhang to put pressure on the stock price: The Union Cabinet approved proposals to divest its 5% stake in NTPC, which may fetch the government over Rs. 55,712.5mn at current market price. Current stake of government in the company is 74.96%, however post divestment, the government holding will come down to 69.96%. Thus, we anticipate temporary pressure on the stock price. 2. Insufficient fuel availability: NTPC meets majority of the coal requirement from CIL and SCCL. Currently, due to poor power demand, CIL and SCCL are able to meet the requirements. Any deficit is met by coal import. However, with the revival in economic activities, the demand of power and coal is likely to increase. If CIL and SCCL are not able to meet the demands, then power generators have to rely on imported coal which is not cost effective. Thus lower fuel availability will be negative for the company. 3. Continued distressed financial position of SEBs: NTPC supplies most cost effective power to its customers as compared to other players in the industry. SEBs with its poor financial health are not able to take power from the grid, which to some extent has impacted the performance of the company. Without any improvement in the position, SEBs may continue to back down the power from the grid, which may be negative for NTPC. 4. Delay in Land Acquisition and Regulatory Clearance: NTPC has around 12GW of the capacity where land acquisition and other regulatory clearance like environmental, forest and water are not available. Difficulty in getting the approvals and delay in land acquisition will impact the project execution pace of the company. 10

11 Peer Group Valuation Above stated peers are the major players in the power sector in India and they operate in the regulatory framework. Power Grid Corporation of India Ltd. (PGCIL) is the market leader in the transmission space in India. NTPC is the only company among the above mentioned peers, which is has PPA for 100% of the power generated. Whereas other players have assess to merchant power business, where revenue generation is volatile. We feel that, NTPC being a market leader in power generation space operating under regulated business model with high revenue visibility, is under valued as compared to its peers. Moreover, we expect, the company has enough potential to grow taking into consideration its project inventory, financial position and cash flow generation ability. Valuation: Companies CMP (Rs.) MCAP (Rs.mn) Stock Return (%) 1M 3M 6M 12M LTM Revenue (Rs. mn) LTM EBIDTA Margin (%) LTM PAT Margin (%) NTPC Ltd ,131, % -10.9% -6.0% -8.9% 732, % 14.0% Adani Power Ltd , % -37.7% -39.0% -53.4% 195, % -4.2% Tata Power Co., Ltd , % -6.9% -13.3% -30.6% 343, % 1.2% JSW Energy Ltd , % -14.6% -12.1% 23.7% 93, % 14.7% Power Grid Corporation of India Ltd , % -6.3% -5.0% 2.3% 176, % 28.6% Companies FV (Rs.) EPS (Rs.) BVPS (Rs.) Based on the below conservative operating assumption, we estimate NTPC s total operating income to grow at 7.2% CAGR over FY15-17 to Rs. 840,994.7mn, while PAT to grow at 6.4% CAGR over the same period to Rs. 116,407.8mn. At CMP of Rs , the company s share is trading at TTM P/E multiple of 11x. Additionally, the company is trading at P/BVPS and EV/EBITDA multiple of 1.4x and 11.1x, respectively. Based on P/E valuation, we value NTPC with at a target price of Rs. 169 per share, reflecting a return of 23%. Thus we recommend a rating on the stock. DPS (Rs.) Debt Equity Ratio RoE (%) P / E (x) P / B (x) EV / EBITDA (x) NTPC Ltd % Adani Power Ltd % Tata Power Co., Ltd % JSW Energy Ltd % Power Grid Corporation of India Ltd % Financial Assumptions FY16E FY17E Capacity Addition (MW) 2,403 1,850 Group Installed Capacity (MW) 46,801 48,651 Commercial Capacity Addition (MW) 2,358 2,350 Commercial Capacity (MW) 45,501 47,851 Regulated Equity (Rs. mn) 401, ,683 Coal PLF (%) 77% 81% Gas PLF (%) 31% 35% Power Generation (mn units) 233, ,099 Power Sales Volume (mn units) 217, ,147 Coal Consumption (mn tonnes) Gas Consumption (mmbtu) Average Realization per Unit (Rs.) Average Fuel Cost per Unit (Rs.) Tax Rate (%) 20% 17% 11

12 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 NTPC Ltd. Valuation Bands P/E Band: Stock is available at P/E, which is 17.7% discount to average P/E Current P/e Average P/E Range Lower P/E Range Higher P/E Range Share Price P/E 8x P/E 10x P/E 12x P/E 14x P/E 18x P/BVPS Band: Current P/BVPS is at 23% discount to average P/BVPS Current P/BVPS Average P/BVPS Lower P/BVPS Higher P/BVPS Share Price P/BVPS 1x P/BVPS 1.5x P/BVPS 2x P/BVPS 2.5x EV/EBITDA Band: Current EV/EBITDA is at 8.2% discount to average EV/EBITDA 16 2,500, ,000, ,500,000 1,000,000 Current EV/EBITDA Average EV/EBITDA Lower EV/EBITDA Higher EV/EBITDA EV EV/EBITDA 8x EV/EBITDA 10x EV/EBITDA 12x EV/EBITDA 14x 12

13 Consolidated Financial Statement Profit and Loss Statement Projections (Rs. mn) FY12 FY13 FY14 FY15 FY16E FY17E Total Operating Income 620, , , , , ,692 Revenue Growth Rate (%) 9.0% 5.9% 9.6% 1.7% -1.1% 17.9% Total Expenditure (480,124) (485,947) (542,275) (571,605) (555,649) (640,249) EBITDA 140, , , , , ,442 EBITDA Growth Rate (%) 2.9% 21.8% 4.1% -9.6% 4.7% 26.7% EBITDA Margin (%) 22.6% 26.0% 24.7% 22.0% 23.3% 25.0% Depreciation (27,917) (33,968) (41,422) (49,117) (54,417) (61,787) EBIT 112, , , , , ,656 Interest (17,116) (19,244) (24,066) (27,436) (29,432) (32,547) Other Income 27,897 31,188 26,620 21,163 19,783 20,360 Exceptional Item 0 16, PBT 123, , , , , ,469 Income Tax Expenses (31,024) (39,592) (29,299) (2,558) (20,794) (23,061) PAT 92, , , ,909 83, ,408 PAT Growth Rate (%) 1.3% 18.6% 0.4% -6.2% -18.7% 39.2% PAT Margin (%) 14.9% 16.6% 15.2% 14.0% 11.5% 13.6% Balance Sheet Projections (Rs. mn) FY12 FY13 FY14 FY15 FY16E FY17E Share Capital 82,455 82,455 82,455 82,455 82,455 82,455 Reserves And Surplus 650, , , , , ,150 Deferred Revenue 14,301 12,441 16,099 13,942 13,942 13,942 Long-Term Borrowings 459, , , , , ,018 Deferred Tax Liabilities (Net) 6,369 9,153 10,516 9,791 8,098 9,547 Other Long-Term Liabilities 17,291 19,698 25,125 28,866 28,866 28,866 Long-Term Provisions 6,037 7,399 8,794 11,157 8,444 9,955 Short-Term Borrowings , ,800 Trade Payables 44,607 51,324 64,296 59,532 37,869 44,385 Other Current Liabilities 95, , , , , ,287 Short-Term Provisions 32,337 70,045 73,026 77,588 75,782 89,340 Total Liabilities 1,408,307 1,611,165 1,795,542 1,970,847 2,140,573 2,349,743 Tangilble Assets 450, , , , ,889 1,221,068 Intangible Assets 2,119 2,487 2,450 46, CWIP 418, , , , , ,611 Intangible Assets Under Development Non-Current Investments 95,839 91,376 81,209 71,541 71,541 71,541 Long Term Loans And Advances 53,944 96, , , , ,279 Other Non Current Assets 13,719 14,912 17,868 16,968 16,968 16,968 Current Investments 16,225 16,225 16,370 18,781 18,781 18,781 Inventories 37,029 40,572 53,734 74,530 69,438 77,183 Trade Receivables 58,325 53,650 52,201 76,044 77,374 86,539 Cash And Bank Balances 161, , , , , ,800 Short-Term Loans And Advances 15,433 17,456 31,160 24,076 24,076 24,076 Other Current Assets 85, ,508 92,120 51,416 86, ,898 Total Assets 1,408,307 1,611,165 1,795,542 1,970,847 2,140,573 2,349,743 13

14 Consolidated Financial Statement (Contd ) NTPC Ltd. Cash Flow Statement Projections (Rs. mn) FY12 FY13 FY14 FY15 FY16E FY17E Profit Before Tax 123, , , , , ,469 Depreciation and Amortization 27,917 33,968 41,422 49,117 54,417 61,787 Other Adjustments (11,286) (9,875) 5,335 (53,907) 12,869 15,984 Change in Working Capital (22,071) (5,971) (2,919) 52,583 (105,664) 12,405 Income Tax Paid (10,723) (28,956) (25,563) (2,558) (20,794) (23,061) Cash Flow from Operating Activities 107, , , ,701 45, ,583 CAPEX (107,944) (162,967) (167,397) (228,830) (181,035) (213,423) Change in Investments 18,039 16,225 16,225 7, Others 11,100 6,573 11,375 (1,328) 16,563 16,563 Cash Flow from Investing Activities (78,805) (140,169) (139,797) (222,901) (164,472) (196,860) Net Change in Borrowings 52,135 72,624 73, , ,736 74,758 Interest Expenses (38,851) (38,315) (47,414) (27,436) (29,432) (32,547) Dividend & Dividend Tax (41,146) (40,688) (57,881) (23,706) (19,235) (26,774) Others (829) (1,146) (1,527) (62,250) 0 0 Cash Flow from Financing Activities (28,691) (7,524) (33,090) 47, ,069 15,438 Net Cash Inflow / Outflow (398) 7,259 (15,562) (24,326) 11,851 25,161 Opening Cash & Cash Equivalents 161, , , , , ,639 Closing Cash & Cash Equivalent 161, , , , , ,800 Financial Ratios Particulars FY12 FY13 FY14 FY15 FY16E FY17E Profitability & Return Ratios EBITDA Margin (%) 22.6% 26.0% 24.7% 22.0% 23.3% 25.0% PAT Margin (%) 14.9% 16.6% 15.2% 14.0% 11.5% 13.6% RONW (%) 13.1% 14.2% 13.2% 12.3% 9.9% 12.6% RoCE (%) 9.6% 10.5% 9.3% 7.0% 6.4% 7.6% Working Capital & Liquidity Ratios Payables (Days) Inventory (Days) Receivables (Days) Current Ratio (X) Turnover & Leverage Ratios Fixed Asset Turnover (X) Total Asset Turnover (X) Debt Equity Ratio (X) Dividend Pay Out Ratio 38.4% 32.0% 45.1% 20.0% 20.0% 20.0% Dupont Analysis (Decomposed ROE) 13.1% 16.4% 13.2% 12.3% 9.9% 12.6% Tax Burden (PAT / PBT) Interest Burden (PBT / PBIT) EBIT Margin 18.1% 20.9% 19.0% 15.3% 15.8% 17.8% Total Asset Turnover Ratio (Net Sales / Total Asset) Leverage Ratio (Total Asset / Total Equity) Valuation Ratios DPS (Rs.) BVPS (Rs.) EPS (Rs. Cr) P / E (X) P / BVPS (X)

15 Choice s Rating Rationale The price target for a large cap stock represents the value the analyst expects the stock to reach over next 12 months. For a stock to be classified as Outperform, the expected return must exceed the local risk free return by at least 5% over the next 12 months. For a stock to be classified as Underperform, the stock return must be below the local risk free return by at least 5% over the next 12 months. Stocks between these bands are classified as Neutral. Rating Legend Rating Upside Absolute Return >15% Accumulate Absolute Return Between 10-15% Hold Absolute Return Between 0-10% Reduce Absolute Return 0 To Negative 10% Sell Absolute Return > Negative 10% Institutional Equity Team Name Ajay Kejriwal Sumeet Bagadia Amit Singh Devendra Gaikwad Rajnath Yadav Satish Kumar Chandrakant Maske Kunal Parmar Ritesh Patel Amit Pathania Vikas Chaudhari Trirashmi Ghoderao Designation President Head of Research VP - Institutional Sales Sr. Manager - Institutional Sales Research Analyst Research Analyst Research Associate Research Associate Research Associate Research Associate Research Associate Research Advisor id ajay@choiceindia.com sumeet.bagadia@choiceindia.com amit.singh@choiceindia.com devendra.gaikwad@choiceindia.com rajnath.yadav@choiceindia.com satish.kumar@choiceindia.com chandrakant.maske@choiceindia.com kunal.parmar@choiceindia.com ritesh.patel@choiceindia.com amit.pathania@choiceindia.com vikas.chaudhari@choiceindia.com trirashmi.ghoderao@choiceindia.com es Contact No Disclaimer This is solely for information of clients of Choice Broking and does not construe to be an investment advice. It is also not intended as an offer or solicitation for the purchase and sale of any financial instruments. Any action taken by you on the basis of the information contained herein is your responsibility alone and Choice Broking its subsidiaries or its employees or associates will not be liable in any manner for the consequences of such action taken by you. We have exercised due diligence in checking the correctness and authenticity of the information contained in this recommendation, but Choice Broking or any of its subsidiaries or associates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this recommendation or any action taken on basis of this information. This report is based on the fundamental analysis with a view to forecast future price. The Research analysts for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. Choice Broking has based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Choice Broking makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. The opinions contained within the report are based upon publicly available information at the time of publication and are subject to change without notice. The information and any disclosures provided herein are in summary form and have been prepared for informational purposes. The recommendations and suggested price levels are intended purely for stock market investment purposes. The recommendations are valid for the day of the report and will remain valid till the target period. The information and any disclosures provided herein may be considered confidential. Any use, distribution, modification, copying, forwarding or disclosure by any person is strictly prohibited. The information and any disclosures provided herein do not constitute a solicitation or offer to purchase or sell any security or other financial product or instrument. The current performance may be unaudited. Past performance does not guarantee future returns. There can be no assurance that investments will achieve any targeted rates of return, and there is no guarantee against the loss of your entire investment. POTENTIAL CONFLICT OF INTEREST DISCLOSURE (as on date of report) Disclosure of interest statement Analyst interest of the stock /Instrument(s): - No. Firm interest of the stock / Instrument (s): - No Choice Equity Broking Pvt. Ltd. Choice House, Shree Shakambhari Corporate Park, Plt No: , J.B. Nagar, Andheri (East), Mumbai Rajnath Yadav Digitally signed by Rajnath Yadav DN: cn=rajnath Yadav, o=choice Equity Broking Pvt. Ltd., ou=analyst - Institutional Research, =rajnath.yadav@choiceindia.c om, c=in Date: :53:47 +05'30' 15