NTPC Lacklustre quarter - Buy:: RBS

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NTPC
Lacklustre quarter
NTPC reported a lacklustre quarter, with profits impacted by one offs. Going
forward, we believe capacity addition will be key to earnings growth. We remain
confident on the project pipeline. In our view, the company remains a low-risk
defensive in the Indian utility space. We maintain our Buy rating on the stock.


2Q11 profit below our estimate when adjusted for one offs
Though revenue of Rs130.8bn was in line with our estimate, profitability was impacted by
escalation in other expenses on account of higher operating costs and lower recovery of
fixed costs in some plants due to lower plant availability. In addition, there were several oneoffs
relating to prior-period revenues and depreciation-related adjustments, adjusting for
which, 2Q profit at Rs18.5bn fell short of our expectation. Profit was further impacted by
higher deferred taxes due to an adjustment in deprecation, resulting in an effective tax rate of
30.4% during the quarter vs the usual 20-22%. We have adjusted our FY11F to reflect these
changes.
We remain confident on the company’s project pipeline
NTPC currently has about 18,000MW of capacity at various stages of execution. We expect
it to add about 9,000MW capacity (standalone) over the next three years. A significant
portion of the company’s planned expansion is through brownfield expansion, which will
reduce the attendant execution risk, in our view. We estimate about 2,150MW of standalone
capacity will come online during FY11 and another 2,100MW will become operational in
FY12. The company’s overall project pipeline remains strong, with several projects of about
15GW in total under construction, which are likely to come online by FY15F. We note this is,
by far, the largest capacity being built by any Indian utility.

Estimates and target price cut - a defensive play; maintain Buy
Following the first half results, we reduce our earnings estimates by 0-8% over FY11-13F.
This reduces our DCF-based target price to Rs233 (from Rs244).We like NTPC in the Indian
utility space, as we see it as a low-risk stock compared with its private-sector peers. We do
not rule out an extension of the regulated tariff regime. The stock currently trades at 2.5x
FY11F book value on core RoE of 19%. Maintain Buy.