RESULTS REVIEW NTPC Limited Buy Share Data Market Cap Rs. 1,248.4 bn Price Rs. 151.4 BSE Sensex 9,839.69 Reuters NTPC.BO Bloomberg NATP IN Avg. Volume (52 Week) 2.50 mn 52-Week High/Low Rs. 291 / 113 Shares Outstanding 8,245.5 mn Valuation Ratios Year to 31 March 2009E 2010E EPS (Rs.) 10.3 11.7 +/- (%) 13.8% 13.0% PER (x) 14.7x 13.0x EV/ Sales (x) 3.1x 2.7x EV/ EBITDA (x) 11.1x 9.6x Shareholding Pattern (%) Promoters 90 FIIs 4 Institutions 3 Public & Others 3 Relative Performance 300 260 220 180 140 100 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 NTPC Rebased BSE Index Powering its way through NTPC Limited, India s largest power generation Company, is well positioned to continue on its existing growth trajectory. The recent correction in its stock price makes it an attractive buying opportunity. Our outlook towards the Company remains robust on the back of the following factors: Expansion projects expected to proceed as per schedule: Despite the ongoing liquidity crunch, we believe that NTPC s sound financials and the Government of India (GoI) backing would ensure the timely funding of its planned future projects. The Company has a low debt-equity mix of about 0.52:1, a sound cash flow record in the recent years, stable revenue-generating ability, an AAA credit rating by CRISIL; all these factors should help it in raising the necessary debt for its expansion. The Company also has a sizable cash balance of Rs. 153.6 bn and investments worth Rs. 134.5 bn. Well on track to solve the fuel shortage problem: The overall PLFs of NTPC s plants in the recent quarters have been dented due to fuel shortages. As a result, the Company plans to meet the shortfall by importing about 8 MTPA of coal during FY09. The Company is also taking initiatives to mitigate fuel risks in the long run. It is currently developing 7 coal blocks with estimated mine-able reserves of 3 bn MT and expects to produce about 14 MTPA of coal through its own mines by FY12. Moreover, the Company has also decided to diversify its generation mix by putting a major thrust on hydro-electric, gas and nuclear power projects. Key Figures (Standalone) Quarterly data Q2'08 Q1'09 Q2'09 QoQ% YoY% (Figures in Rs. mn, except per share data) Net Sales 80,169 95,395 96,614 20.5% 1.3% EBITDA 27,490 24,218 25,476 (7.3)% 5.2% Net Profit 19,255 17,265 21,105 9.6% 22.2% Margins(%) EBITDA 34% 25% 26% NPM 24% 18% 22% Per Share Data (Rs.) EPS 2.34 2.09 2.56 9.6% 22.2% Please see the end of the report for disclaimer and disclosures. -1-
At the current market price of Rs. 151.4, NTPC s stock is trading at a forward P/E of 14.7x and 13.0x for FY09E and FY10E, respectively. The recent correction in the stock price provides a good buying opportunity. We have valued the stock at Rs. 194, implying an upside of 28% from the CMP. Thus, we upgrade our rating to Buy. EBITDA for Q2 09 decreased 7.3% yoy on account of higher fuel and staff costs Result Highlights NTPC clocked revenues to the tune of Rs. 96.6 bn for Q2 09. Revenue increased 20.5% yoy partially due to an increase in the realisation rate per unit. However, the EBITDA decreased 7.3% yoy to Rs. 25.5 bn owing to a higher-than-expected increase in fuel and staff costs. However, with softening commodity prices we expect the operating margins to bounce back in the coming quarters. Net profit for the quarter increased 9.6% yoy to Rs. 21.1 bn. The Company paid significantly lower taxes this quarter compared to the same quarter last year (Rs. 1.3 bn in Q2 09, compared with Rs. 5.6 bn in Q2 08). The PLFs for the coal-based and gas-based plants during the quarter stood at 83.1% and 58.2% respectively. The Company generated 47 BU of electricity during the quarter. Historically, the PLFs have been low in the second quarter of every fiscal as coal mining is adversely affected in the monsoon season. Thus, we expect the PLFs to improve in the coming quarters. Key Events Sipat coal fired The second 500 MW Unit of Stage-II NTPC-Sipat Project, situated near Bilaspur in Chattisgarh, was successfully coal fired on November 11, 2009. With the synchronization of this unit, the project has attained full capacity of 1,000 MW under Stage-II. JICA to help enhance efficiency of NTPC s power plants The Ministry of Power, NTPC, and Japan International Agency for Cooperation (JICA) signed an agreement to undertake a joint project with the technical assistance of JICA experts to explore the ways for enhancing the efficiency of NTPC s thermal power plants. Please see the end of the report for disclaimer and disclosures. -2-
Key Risk Any unexpected delays in the commissioning of the new projects and adverse changes in tariff-determination norms can pose a threat to our rating. Huge projects under implementation should ensure steady revenue growth Outlook NTPC has huge expansion plans for the coming decade. It plans to increase its capacity from the current 30 GW to 50 GW by FY2012 and to 75 GW by FY2017. At present, 16 GW of projects are under implementation and equipment orders for a majority of these have already been placed. We believe that the ongoing financial crisis should not affect the financing of these huge projects as the Company enjoys an AAA rating and is backed by the GoI. The Company s revenue-generating ability and its low gearing ratio should also help in raising the necessary funds for expansion. All-round integration likely to generate incremental revenues; thus, returns should further improve Shortage of fuel adversely affected PLFs in the recent quarters but the Company well on track to fix the problem The Company is following its vision of becoming a world class power major as it is diversifying into related segments such as power distribution, power trading, and consultancy. The Company has also formed JVs with private players such as BHEL, TELK, and Bharat Forge to undertake EPC activities and produce power equipments. Apart from generating incremental revenues, these activities should help NTPC in meeting its own needs in the long run. Meanwhile, the Company is expanding geographically by setting up plants in Nigeria (500 MW) and Sri Lanka (1,200 MW). The overall PLFs of NTPC s plants have been adversely affected in the previous quarters due to fuel shortages. However, the Company is progressing well to solve this problem. It has decided to foray into coal mining and envisages to meet 20% of its coal demand through own mines by FY2017. Further, it is also diversifying its generation mix by planning to build hydro-electric and nuclear power plants. It is also planning to increase its capacity of gas-based power plants from the current capacity of 5,435 MW to 8,000 MW by FY2012. Please see the end of the report for disclaimer and disclosures. -3-
Valuation After the recent correction, we believe NTPC s stock should prove to be a good buy. At the CMP of Rs. 151.4, the stock is trading at a forward P/E of 14.7x and 13.0x for FY09E and FY10E, respectively. Based on our DCF valuation, we have arrived at a target price of Rs. 194, assuming a terminal growth rate of 5% and a WACC of 10.5%. Since our target price implies an upside of 28% from the CMP, we upgrade our rating to Buy. Key Figures Year to March FY06 FY07 FY08 FY09E FY10E CAGR (%) (Figures in Rs. mn, except per share data) (FY08-10E) Net Sales 275,478 338,392 386,350 448,078 511,473 15.1% EBITDA 81,538 101,731 117,362 126,251 145,925 11.5% Net Profit 58,408 68,983 74,699 85,039 96,118 13.4% Margins(%) EBITDA 30% 30% 30% 28% 29% NPM 21% 20% 19% 19% 19% Per Share Data (Rs.) Normalised EPS 7.08 8.37 9.06 10.31 11.66 13.4% PER (x) 21.4x 18.1x 16.7x 14.7x 13.0x Sensitivity Analysis WACC 194.4 9.5% 10.0% 10.5% 11.0% 11.5% 4.0% 209 184 164 147 132 Terminal 4.5% 230 201 178 158 142 Growth 5.0% 255 222 194 172 153 Rate 5.5% 287 246 214 187 166 6.0% 329 277 238 206 181 Please see the end of the report for disclaimer and disclosures. -4-
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