NTPC Earnings to slide :: Edelweiss,

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NTPC
Earnings to slide



􀂃 Headline numbers in line with estimates
NTPC’s Q2FY11 earnings adjusted for extraordinaries (change in depreciation
policy and excess provisioning for dues) were flat at INR 20.7 bn (INR 20.2 bn in
Q2FY10) due to lower efficiency gains, stagnant PLF, and lower other income.
􀂃 Margins impacted due to MAT status and higher operating expenses
The company, hence forth, will pay MAT which takes away the benefit of
efficiency gains from tax grossing up. We expect this change to impact the RoE
by ~250-300bps. Q2FY11 profit was further impacted by rise in O&M expenses
which were higher than the capacity addition. We have accordingly revised down
our earnings estimates by 15% for FY11 and 13% for FY12.
􀂃 Other highlights: Operations and capex
Coal-based stations continued with high PAF of 86.5%, while gas station PAF
improved to 92% during the quarter. The company has already signed PPAs for
62 GW and plans to increase this to 75 GW by January 2011. This will ensure
that incrementally 30–43 GW of upcoming capacities will continue under existing
CERC norms and earn core RoE of ~22-23% (post MAT impact).
􀂃 Lumpiness in capacity addition likely
The pace of capacity addition so far has been sluggish as only ~3.6 GW has been
added in the first three years of the XI Plan period. Management has guided for
~ 3 GW in the current year. FY10 capital WIP of ~ INR 320 bn and FY11 capex
target of INR 230 bn point to the possibility of lumpiness in capacity addition
during subsequent years. While there is visibility in terms of pipeline capacities,
unless the pace of execution improves earnings growth will be under pressure.
􀂃 Outlook and valuations: Earnings under pressure; maintain ‘HOLD’
We have revised down our earnings to INR 85 bn and INR 97 bn for FY11E and
FY12E, respectively, to factor in the RoE impact which is expected to be lower at
~22-23% compared to the current level of ~24-25% as the lower depreciation
and savings from tax on other income will negate some impact. Hence, we have
revised our SOTP target to INR 184 from earlier INR 206 / share highlighting a
~8% downside from CMP of INR 198. While we maintain ‘HOLD’
recommendation, we are downgrading the relative rating to ‘Sector
Underperformer’ from ‘Sector Performer’.