National Thermal Power Corporation Limited (NTPC)

National Thermal Power Corporation Limited (NTPC) Equity Research Desk FPO Note 2 nd February, 2010 Highlights of the Issue Issue Snapshot Issue Period: Feb 03 - Feb 05 2010 Floor Price Issue Size Market Cap (At Floor Price) Issue Size Fresh Issue Offer for Sale Employee Reservation QIB Non-Institutional Retail Face Value: Book Value: Capital Structure: Pre Issue Capital Post Issue Capital Rs.201 Rs. 82.87 bn Rs. 1657.34 bn 412,273,220 shares 0 shares 412,273,220 shares 4,273,220 shares 204,000,000 shares 61,200,000 shares 142,800,000 shares Rs.10 Rs.75.01 as on Sep'2009 Rs.8,245.5 cr Rs.8,245.5 cr Shareholding Pattern Preissue (%) Post issue (%) Promoter 89.50 84.50 Public 10.50 15.50 Total 100.00 100.00 Total no. of shares 8,245,464,400 8,245,464,400 250 230 210 190 170 150 NTPC (BSE) Website: www.ntpc.co.in Research Analyst Floor Price Tarun Surana tarun.surana@spagroupindia.com NTPC is the largest Power generation company in the country and was promoted by the Government of India, with an objective of developing power generation projects. The company has an installed capacity of 30,644 MW at the end of H1FY10. Investment Arguments Best proxy to play exciting Indian Power Sector story. Over 30,000 MW of installed capacity, set to expand to 75,000 MW by FY17. Long term power purchase agreements with customers with secured payments. A GoI undertaking with Navratna status Strong internal accruals and a healthy balance sheet (D/E ratio of just 0.6x) provide ability to leverage without diluting equity for entire proposed capacity addition to reach 75,000 MW till 2017. High operational efficiency of coal-based stations. Additional returns than the regulated ROE through merchant power plants. Ability to turn around underperforming stations such as Dabhol. Investment Concerns Regulated tariff caps upside on Return on Equity on long term PPAs. Aggressive capacity addition raises concerns over fuel availability, which depends on NTPC s ability to develop allotted coal blocks and acquire coal mines abroad for plants based on Imported-coal. Valuation At the floor price of Rs. 201, NTPC is attractively valued as compared to peers in the power generation space in India. The Enterprise Value per MW of Installed capacity (EV/MW) is only Rs 61.7mn, which is significantly lower than its peers. EV/MW for FY12 stands at Rs 49.2mn, very close to its replacement cost. On P/BV and P/E basis, the stock is available at 2.7x and 19.1x on floor price respectively. We recommend investors to Buy NTPC shares for long term. Though NTPC is attractive at Rs. 201, the discount of just 5% to Monday s (1 st Feb 2010) closing price is very less, which presents investors with an opportunity to buy shares from secondary market as well. As QIBs will have to bid higher than floor price (French auction method), The floor price does not leave much on table for buying shares through FPO. I n s t. D e a l i n g D e s k : 1 0 1, 1 0 th F l o o r, M i t t a l C o u r t A - W i n g, N a r i m a n P o i n t, M u m b a i 4 0 0 0 2 1 T e l. N o. : 022-4 0 4 3 9 0 0 0, F a x N o. 2 2 8 7 1 1 9 2 / 2 2 8 4 6 3 1 8 E m a i l : r e s e a r c h @ s p a s e c u r i t i e s. c o m Page 1 of 7

Company Background Largest power generation company in India NTPC is the largest power generating company in India. As of September 30, 2009, its owned installed power generating capacity is approximately 18.6% of India's total installed capacity. In FY09, NTPC contributed 28.6% of the total power generation of India. According to a study conducted by Platts, a division of the McGraw-Hill Companies, in 2009, NTPC was the top independent power producer ( IPP ) in Asia, and ranked second in the world, on the basis of asset worth, revenues, profits and return on invested capital. Over 30,000 MW of installed capacity As of Sep 09, its total installed power generation capacity was 30,644 MW, including 28,350 MW of generation capacity through 112 units owned by it and 2,294 MW of capacity through two joint venture companies. Of the total owned capacity, 86% is coalbased, operated through 15 coal based power stations, and 14% is gas-based, and operated through seven gas-based power stations (including one naphtha-fired station). In FY09, the company generated 206.9bn units of electricity through its owned stations. Higher availability of plants with higher PLFs The company operates its stations at a level of efficiency that exceeds the average in India, based upon availability factor (which is a measure of how often a station is available to generate power) and average plant load factor ( PLF ). In FY09, its coal-based stations operated at an average availability factor of 92.5%, and they achieved an average PLF of 91.1%, compared to the all-india average PLF for coal-based stations of 77.2%. In FY09, of its 15 coal-based power stations, four operated at a PLF of greater than 95.0% and one operated at a PLF of 99.4%. In FY09, Its gas-based stations operated at an average availability of 86.7% and an average PLF of 67.0%, compared to the all-india average PLF for gas-based stations of 57.6%. PLF of its gas-based stations has improved to 78.4% in the H1FY10 due to increased gas availability. In FY09, its average selling price of electricity was Rs. 2.12 per unit. Set to achieve 75,000 MW capacity by FY17 The company is presently engaged in construction activities for projects representing 17,930 MW (including 4,000 MW undertaken by its joint venture companies). It is also pursuing a basket of projects for approximately 33,000 MW of capacity which are in various stages, including projects for which tender has been invited, a FR prepared, or a FR is under preparation and approval, in order to achieve its stated goal of 75,000 MW capacity by FY17. It takes up new projects only after establishing the availability of inputs such as land, water, fuel, off-take arrangements and environmental clearances. Looking to capitalise on opportunity of merchant power Currently, all of its total sales of electricity are made pursuant to long term PPAs. More than 90% of the sales of electricity are to SEBs and state owned distribution companies for which payments are secured through letter of credits ( LC ) and the Tripartite Agreements. For private distribution company customers, payments are secured through letters of credit backed by a first charge created on their receivables in its favour. In order to capitalize on the opportunity from the sale of merchant power, NTPC is implementing 2,120 MW of power projects, as merchant power plants ( MPPS ) for selling power outside long-term PPAs at a market-based price. As provided by the National Electricity Policy, 2005, up to 15% of new generating capacity may be sold outside long-term PPAs. However, some of the power generation from our merchant capacity may also be sold under PPAs. 2 S P A S e c u r i t i e s L i m i t e d

Investment Arguments Power accounts for over 30% of the spend on Infrastructure in 11 th plan The GoI has identified infrastructure inadequacy as a significant constraint in realizing India s economic growth objectives. In particular, the power sector has been recognized by the GoI as a key infrastructure to sustain economic growth. Under the Eleventh Plan, the power sector is expected to attract 30.4% of the total investment in infrastructure during the Plan. Of the total expected investment of Rs. 7,253.33 billion in electricity, Rs. 4,034.76 billion (56%) is expected to be invested for generation, Rs. 1,520.77 billion (21%) for transmission and Rs. 1,697.22 (23%) billion for distribution. Demand for power has been higher than supply and the deficit in increasing The Indian power sector has historically been characterized by energy shortages which have been increasing over the years. The demand for electricity has consistently exceeded the supply, and the demand supply gap has been widening as may be seen from the table below. In FY09, peak energy deficit was estimated to be at 11.9% and total energy requirement deficit was estimated to be 11.1%. NTPC is leading power generation company and will continue to dominate Indian power sector. Peak Demand Energy Requirement Fiscal Demand Availability Deficit Deficit Requirement Availability Deficit Deficit Year (MW) (MW) (MW) (%) (MU) (MU) (MU) (%) 2001 78,037 67,880 10,157 13 507,216 467,400 39,816 7.8 2002 78,441 69,189 9,252 11.8 522,537 483,350 39,187 7.5 2003 81,492 71,547 9,945 12.2 545,983 497,890 48,093 8.8 2004 84,574 75,066 9,508 11.2 559,264 519,398 39,866 7.1 2005 87,906 77,652 10,254 11.7 591,373 548,115 43,258 7.3 2006 93,255 81,792 11,463 12.3 631,554 578,819 52,735 8.4 2007 100,715 86,818 13,897 13.8 690,587 624,495 66,092 9.6 2008 108,866 90,793 18,073 16.6 737,052 664,660 72,392 9.8 2009 109,809 96,785 13,024 11.9 777,039 691,038 86,001 11.1 Source: Ministry of Power, SPA Research Merchant Power Plants MPPs generate electricity for sale at market driven rates in the open, wholesale market. Typically, MPPs do not have PPAs and are built and owned by power developers. Merchant sales, however, include sale of power under short-term PPAs and on a spottrade basis. Many new private sector market entrants are beginning to adopt the MPP model for their projects to generate higher returns as opposed to selling power through a long term PPA, as the off take risk is perceived to be lower in view of significant power shortages in the country. The MPPs can sell power to the power trading companies, the SEBs, and industrial and bulk consumers, subject to availability of Open Access for transmission of the merchant power. NTPC is also setting up merchant power capacity in excess of 2,000 MW to capitalize on the opportunity, which will result in higher ROE as we believe merchant power can be sold at Rs. 4-5 per unit on a sustainable basis. 3 S P A S e c u r i t i e s L i m i t e d

Investment Concerns Execution challenges may lead to delay in commissioning of projects We expect NTPC to face execution challenges in large power projects. There are lot of factors which can delay the projects such as environmental clearances, fuel security, land acquisition, delay in delivery of equipments. The delays can cause cost overruns and can hurt company s financial performance. Hug funding requirements for capacity addition NTPC will need significant capital to finance capacity expansions. The company plans to add ~ 44,000 MW by 2017 to reach at the capacity of 75,000 MW. Each MW of capacity addition requires around Rs 45mn. The total funding requirement till 2017 is estimated at Rs. ~2,000bn. The funding mix for new capacity addition will be 70:30 (Debt: Equity). NTPC will require Rs. ~600bn of equity contribution, while it needs to raise Rs. ~1,400bn through debt. Massive fuel requirement for planned capacities The ability to ensure unconstrained availability of fuels at competitive prices during the life cycle of existing and planned thermal power stations remains crucial. Fuel represents its largest expense and the two primary fuels are coal and gas, with approximately 86% of current owned generating capacity being coal-based and 14%, gas-based. Coal requirement will be 168 MTPA by 2012 With respect to coal mining, significant investments would be required to exploit and mine these reserves. NTPC would require 168.2 MTPA of coal by 2012. The requirement for coal is expected to increase significantly in the future, driven by significant capacity addition in the power sector. High dependence on domestic coal could therefore expose it to potential price and availability risks. Due to such coal shortages, NTPC may lose some generation from its coal-based stations. The company also sources imported coal through two public sector undertakings and also through e-auctions conducted by the subsidiary coal companies of Coal India Ltd. Gas requirement will be 16.4 MMSCMD by 2012 With respect to gas, NTPC s use has been limited in the past due to inadequate supply. This has adversely affected the generation at gas-based stations. If the shortage of supply of gas intensifies, the productivity of gas-based stations would be further reduced. NTPC would require 16.39 MMSCMD of gas during FY12 at 85% PLF. Objects of the Issue The objects of the Offer are to carry out the divestment of 412,273,220 Equity Shares by the Selling Shareholder (Government of India). NTPC will not receive any proceeds from the Offer and all proceeds shall go to the Selling Shareholder. The issue expenses will be borne by the selling shareholder. 4 S P A S e c u r i t i e s L i m i t e d

Financial Statements (Rs. in million) FY08 FY09 1HFY09 1HFY10 Revenues: Sales 370,501 419,238 192,009 227,855 Energy internally consumed 409 514 244 281 Provisions written back 64 170 3 55 Other income 29,203 32,806 14,374 14,837 Total Revenues 400,177 452,728 206,630 243,028 Expenditures: Fuel 220,202 271,107 120,944 143,495 Employees' remuneration 18,960 24,631 11,826 10,945 administration & other Exps 16,284 18,192 8,677 9,908 Depreciation 21,385 23,645 10,791 12,565 Provisions 71 246 0 2 Interest and finance charges 17,981 20,229 9,483 9,854 Total Expenditures 294,883 358,050 161,721 186,769 PBT Prior Period Adj and Extraordinary Items 105,294 94,678 44,909 56,259 Prior period income/expenditure (net) 2,745 1,083 868-389 Profit before Tax 102,549 93,595 44,041 56,648 Provision for current and fringe benefit tax 28,486 11,594 5,672 11,578 Provision for deferred tax 1,411-4,488-1,034 1,614 Less: Deferred tax recoverable 1,411-4,488-1,034 0 Current/Fringe benefit tax 85 12 2 0 Net Taxation 28,401 11,582 5,670 13,192 Profit after Tax 74,148 82,013 38,371 43,456 5 S P A S e c u r i t i e s L i m i t e d

Fixed Assets (A): FY08 FY09 1HFY10 Gross Block 533680 623530 626180 Less: Depreciation 272743 294153 307429 Net Block 260937 329377 318751 Capital Work-in-Progress 184389 212211 250617 Construction Stores and Advances 40394 51838 52547 Sub-total (A) 485720 593426 621915 Investments (B) 152672 139835 164590 Deferred Foreign Currency Fluctuation Assets (C) 0 9734 8487 Current Assets, Loans & Advances (D): Inventories 26757 32434 27047 Sundry Debtors 29827 35842 56133 Cash and Bank Balances 149332 162716 163868 Other Current Assets 9218 9792 10221 Loans and Advances 40354 68469 35267 Sub-total (D) 255488 309253 292536 Liabilities & Provisions (E): Secured Loans 73147 89696 92359 Unsecured Loans 198759 255982 254620 Deferred Tax Liability (net) 1 1 1615 Deferred Revenue - Advance against Depreciation 13734 19360 16185 Deferred Income from Foreign Currency Fluctuation 0 6077 4563 Deferred Foreign Currency Fluctuation Liability 2544 545 623 Current Liabilities 55483 74391 81300 Provisions 23816 32495 19106 Sub-total (E) 367494 478547 470371 NET WORTH (A+B+C+D-E) 526386 573701 617157 Represented by: Share Capital (F) 82455 82455 82455 Reserves and Surplus (G) 443931 491546 534702 NET WORTH (F+G) 526386 574001 617157 6 S P A S e c u r i t i e s L i m i t e d

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