RESULTS REVIEW Share Data Market Cap Rs. 1,457.0 bn Price Rs. 176.70 BSE Sensex 9,201.85 Reuters NTPC.BO Bloomberg NATP IN Avg. Volume (52 Week) 2.06 mn 52-Week High/Low Rs. 227 / 113 Shares Outstanding 8,245.5 mn Valuation Ratios Year to 31 March 2009E 2010E EPS (Rs.) 10.1 11.9 +/- (%) 11.1% 18.4% PER (x) 17.6x 14.8x EV/ Sales (x) 3.6x 3.0x EV/ EBITDA (x) 13.4x 10.6x Shareholding Pattern (%) Promoters 90 FIIs 4 Institutions 3 Public & Others 3 Relative Performance 240 200 160 120 80 Feb-08 Mar-08 Apr-08 NTPC May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Rebased BSE Index Feb-09 NTPC Limited A long-term performer We remain positive on NTPC s long-term performance and its ability to generate consistent returns for its shareholders. Driven by encouraging revised tariff determination norms and other incentives proposed by the Central Electricity Regulatory Commission (CERC), we have increased our target price from Rs. 195 to Rs. 221 and maintain a Buy rating for the stock. The revised guidelines proposed by the CERC for the period 2009-14 are as follows: Higher guaranteed returns: The increase in the cap on return on equity (ROE) for tariff determination from 14% to 15.5% for the next five years, per se, has increased our valuation for the stock by around 10%. Moreover, an additional 0.5% ROE for commissioning projects within the scheduled timeline could further improve the earnings of the Company. Tax holiday benefit could mean higher ROE: The effective RoE on new power projects of NTPC could turn out to be higher than the cap of 15.5% as the new regulations allow companies to benefit from the 10-year tax holiday for power projects. In such a case, even though the base rate RoE of 15.5% would be grossed up by the applicable corporate tax rate, i.e. 33.9%, NTPC would only be required to pay the minimum alternate tax of 11.3%, implying an effective RoE of 20.8% on the new projects. Buy A favourable move from PLF based incentive to availability based incentive: PLF based incentives were largely dependent upon fuel supply. Thus, fuel scarcity an external factor used to deprive the Company of potential incentives. Key Figures Quarterly data Q3'08 Q2'09 Q3'09 QoQ% YoY% (Figures in Rs. mn, except per share data) Net Sales 93,308 96,614 112,771 20.9% 16.7% Adj. EBITDA 29,691 25,476 32,086 8.1% 25.9% Adj. Net Profit 17,798 21,105 22,509 26.5% 6.7% Margins(%) EBITDA 32% 26% 28% NPM 19% 22% 20% Per Share Data (Rs.) Adj. EPS 2.16 2.56 2.73 26.5% 6.7% Please see the end of the report for disclaimer and disclosures. -1-
Effective ROE could be much higher As per the new guidelines, incentives would now be made available on plant availability on which the Company has greater control. We thus believe that NTPC would benefit immensely from this change in guideline. Particulars Project Cost Debt - 70% of Project Cost Equity - 30% of Project Cost Major Components of AFC* Interest on Debt @ 8% ROE Depreciation O & M expenses In Rs. Mn/MW 2009-14 2004-09 45 45 31.5 31.5 13.5 13.5 2.5 2.5 2.1 1.9 2.4 2.1 1.3 1.3 Total AFC 8.3 7.8 Plant Availability of NTPC (base case - %) Specified Plant Availability (%) Recovery of AFC Availability based incentive 90% 90% 85% 80% 8.8 7.8 0.5 0.0 PLF based incentive 0.0 0.2 Total ROE 2.6 2.1 Effective ROE (%) 19.1% 15.5% *AFC - Annual Fixed Cost Investment opportunities aplenty Long-term reinvestment opportunity intact: NTPC is suitably poised to continuously create value for its shareholders by reaping the benefits of the explosive growth the Indian power sector is heading to. XIth five-year plan on track: With 18,800 MW capacity under construction and expected to commission by FY12, the sizable liquid funds in NTPC s balance sheet would soon move to greener pastures in terms of generating returns for the shareholders. The Company currently has a cash balance of Rs. 165 bn and GoI issued bonds worth Rs. 134.4 bn. Ever-growing demand for power: Demand for electricity in India has historically grown by 1.5-2 times the GDP growth in the country. The GoI has ambitious capacity addition targets for the next decade to eliminate the power deficit in the country as well as meeting the expected increase in demand. NTPC being the largest player in the sector is bound to benefit from this excessive demand scenario. It plans to increase its capacity from 30 GW at present to 50 GW by FY12. Please see the end of the report for disclaimer and disclosures. -2-
Valuations suggest an upside: After revising our estimates according to new CERC guidelines and incorporating the latest Company guidance, our DCF based valuation gives a target price of Rs. 221, which implies a potential upside of 25% from the current market price of Rs. 176.7. We thus, maintain our Buy rating on the stock. Sales up 20.9% yoy on account of higher fuel costs Result Highlights and Outlook NTPC s net sales for Q3 09 increased 20.9% yoy to Rs. 112.8 bn. The increase in sales was primarily on account of higher fuel cost which is a pass-on cost for NTPC. We estimate net sales CAGR of 17-18% over FY08-10E for NTPC on account of capacity expansion during the period and higher capacity charges as indicated by the new CERC guidelines. The bottom line of the Company for Q3 09 increased 26.5% yoy led by an increase in other income (interest on bonds and surplus cash) and a lower tax provision compared to the same period previous year. We expect Net Margin of the Company to decline in the coming quarters as surplus cash would be directed towards capital work in progress, thus, implying lower interest income for NTPC. PLFs expected to be under pressure due to coal shortages The PLFs for the quarter stood healthy during Q3 09. However, NTPC is currently facing severe coal shortages for some of its plants and we thus, expect a drop in PLFs for coal-based stations in the coming quarter. However, PLFs for gas-based stations should improve as supply of gas from Reliance Industries Ltd. (RIL) s KG-D6 block is expected to commission by February end. A strong balance sheet position should ensure timely project completion With over 18,800 MW capacity under construction and expected to commission by FY12, NTPC s profitability is set to improve considerably in the coming years. Moreover, the new tariff determination norms would allow for higher potential returns to be earned by the project developers. The stable cash generating ability of NTPC coupled with its strong balance sheet position (capital gearing of 36%) should ensure that the projects are completed as per schedule. Please see the end of the report for disclaimer and disclosures. -3-
Key Events 1,000 MW capacity begins commercial operation Two 500 MW units one each in Kahalgaon and Sipat began commercial operation on December 30, 2008 and January 1, 2009, respectively. Focusing on backward integration NTPC signed a joint venture agreement with Steel Authority of India Limited (SAIL), Coal India Limited (CIL), Rashtriya Ispat Nigam limited (RINL) and National Mineral Development Corporation (NMDC) to form, promote and incorporate a Special Purpose Vehicle, namely, International Coal Ventures Pvt. Ltd. for securing overseas metallurgical coal and thermal coal assets. Valuations look attractive Valuation NTPC s stock is currently trading at a forward P/E of 17.6x and 14.8x for FY09E and FY10E, respectively. For our DCF based valuation we have assumed a 14% cap on ROE from 2015 onwards, a WACC of 11.6% and a terminal growth rate of 5%. Based on these assumptions we have arrived at a target price of Rs. 221, which implies a potential upside of 25% from the CMP of Rs. 176.7. We thus, reiterate our Buy rating for the Company s stock. Key Figures Year to March FY06 FY07 FY08 FY09E FY10E CAGR (%) (Figures in Rs. mn, except per share data) (FY08-10E) Net Sales 275,478 338,392 386,350 445,374 532,677 17.4% EBITDA 81,538 101,731 117,362 119,875 152,267 13.9% Net Profit 58,408 68,983 74,699 83,007 98,243 14.7% Margins(%) EBITDA 30% 30% 30% 27% 29% NPM 21% 20% 19% 19% 18% Per Share Data (Rs.) Normalised EPS 7.08 8.37 9.06 10.07 11.91 14.7% PER (x) 24.9x 21.1x 19.5x 17.6x 14.8x Please see the end of the report for disclaimer and disclosures. -4-
Sensitivity Analysis WACC 221.5 10.6% 11.1% 11.6% 12.1% 12.6% 4.0% 236 214 194 178 163 Terminal 4.5% 255 229 207 188 172 Growth 5.0% 276 246 221 200 182 Rate 5.5% 302 267 238 214 194 6.0% 333 292 258 231 208 Please see the end of the report for disclaimer and disclosures. -5-
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