NTPC MAT grossing to hit ROE by 4%; Downgrade to Hold :: Emkay

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NTPC

MAT grossing to hit ROE by 4%; Downgrade to Hold

HOLD

CMP: Rs 198                                       Target Price: Rs 190

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n     Results disappoint (APAT down 2%) due to (1) grossing up ROE at MAT, (2) Kahalgaon/Farakka continue to report lower PAF (70%) on fuel constraints & (3) lower interest income

n     Changed the grossing up to MAT rate frm earlier full tax rate; to hit profits by Rs10bn or 4% of core ROE from 28% to 24%

n     Reduce earnings by 11-13% in FY11E/12E

n     Valuations at 2.3xFY12E Book value, not attractive on core ROE of 24% (Earlier 28%); Lower target price to Rs190/Share; Downgrade to ‘Hold’

Results disappoint mainly due to grossing up at MAT rate

NTPC reported PAT of Rs21.1bn (down 2% yoy), below expectations of Rs21.5bn. After

adjusting for one time items (depreciation write back, previous year sales and

provisions), APAT stood at Rs18.4bn (down 2% yoy). This is despite company

commercializing 1,480MW of capacity after Q2FY10. The lower than expected PAT is

attributed to (1) grossing up of ROE by MAT rate (hit of Rs2.2bn in Q2FY10), (2) lower

PAF at Kahalgaon and Farakka (hit of Rs0.9bn) and lower other income (Rs0.3bn). We

understand that Kahalgaon STPS with a capacity of 2340MW or 7% of overall capacity,

operated at 67% PLF and Farakka STPS with a capacity of 1600MW or 5% of overall

capacity operated at 71% PLF. This is due to forced outages related to fuel constraints.

Therefore, NTPC could not recover full capacity charges (approx. Rs6.5bn for both the

plants put together). We estimate the loss in the range of Rs0.8-1.0bn. Though this

looks to be a non recurring problem and should be resolved in near future. But the key

issue is grossing up its ROE with MAT rate as against grossing up by full tax rate

earlier. This we believe is significant negative as its going to impact its core ROE by 4%.

The management guided for grossing up at MAT rate in foreseeable future.

Reduce earnings by 11-13% in FY11E/12E driven by MAT grossing up

We are reducing our earnings by 11% and 13% for FY11E and FY12E respectively

driven by lower core ROE of 24% instead of 28% earlier. This is driven by grossing up

at MAT rate (19%) instead of full tax rate earlier (33%). This has resulted in a hit of

Rs10bn and Rs14bn to our FY11E and FY1 earnings post analyst meet. Our current

earnings stand at Rs10/Share in FY11E and Rs11.1/Share in FY12E. We continue to

build in capacity addition of 7040MW in FY10-FY12E. We have not factored merchant

sale out of Korba and Farakka plants in FY11E and FY12E.

Core ROE of 24%; Valuations unattractive; downgrade to ‘Hold’

The earnings cut have hit the FY12E Book by 2% to Rs87/Share. At CMP of Rs198, the

stock is trading at 2.3x FY12E Book Value and 17.8x FY12E earnings. The valuations

are not attractive now at 2.3xFY12E Book considering core ROE of 24% only. We

downgrade the stock to ‘Hold’ rating. We have reduced our target price to Rs190/Share

from Rs220/Share earlier. Based on its core ROE of 24% in FY12E, we have assigned

multiple of 2.4x (cost of equity of 10%) to its core book of Rs602bn and multiple of 1x to

its equity financed cash and equivalents of Rs133bn