NTPC: Positive updates from meeting with management:: HSBC

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NTPC (NATP IN)
N: Positive updates from meeting with management
 Improving PLF at various plants including Farakka and
Kahalgaon bodes well
 Progress on development of captive mines may lead to value
being ascribed to them
 Reiterate INR225 target and Neutral rating. Likely
disappointment on capacity addition an overhang

Takeaways from a recent meeting with NTPC management to discuss the progress of
projects and the company’s outlook:
Plant Load Factor (PLF) improving: We were informed that NTPC has obtained
additional wagons to transport coal to its power plants after NTPC’s CMD met senior
officials of the Railways. This has resulted in improvement in the PLF of their power plants.
Our visit to NTPC’s control room indicated that few of its plants were actually running at
c100% PLF. Further, the PLF at Farakka (73% in FY10) and Kahalgaon (55% in FY10)
power plants improved to 91% and 74%, respectively, on improved availability of coal. We
have not factored the improved PLF into our estimates and wait for it to be sustained.
Progress on captive mining: NTPC is in the final stages of awarding the Mine Developer
cum Operator (MDO) contract for its Pakri Barwadih coal mine. This is a significant
milestone in terms of expediting the production process. As per the company, the mine is
expected to produce 15m tons of coal per annum at full production capacity, which is
expected to be operational by end-FY13. If we estimate net post tax income of INR600
per ton this translates into an income of INR1.1 per share (FY14) implying an upside of
INR15 to our target price at our implied target multiple.
Valuation of captive coal reserves could be a catalyst: NTPC has been allocated
captive coal mines with reserves of c3.6bn tons in addition to c2.3bn tons of mines in a JV
with Coal India Limited (CIL). Overall, the reserves are c30% of CIL’s reserves of 18.9bn
tons. Total production from these mines is expected to be 86m tons per annum at full
capacity as compared to the current production of 431mt of CIL in FY10. However,
given the delays in the development of these mines (and being captive mines), the street as
well as HSBC and investors have not ascribed any value to these mines.
Valuation and risks: We use DCF to value NTPC. We reiterate our Neutral rating and
INR225 target. We expect the company to disappoint on its capacity addition plan, which
will likely keep the share price range-bound. The key upside risk is faster-than-expected
execution of projects under construction.