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NTPC (NTPC.BO)
Buy: Don’t Panic – Most of the Concerns Are in the Price Now
Why has NTPC underperformed the BSE Sensex by 89% over last 2 years? —
NTPC’s capacity additions have been far below targets, with the company
averaging 1.43GW/year in the first 3 years (FY08, FY09 and FY10) of the XIth Five
Year Plan vs promised 2-3GW/year of additions. Parent additions at 0.83GW/year
are even lower, leading to average MoM generation growth of 4% post 2QFY08
from 9% prior levels. This has led to poor EPS growth of 4% CAGR over FY07-10.
This should change going forward on — (1) Advance ordering of equipment in bulk
tenders and (2) NTPC diversifying the base of BTG suppliers to other domestic
equipment manufacturers. As a consequence, we expect NTPC to add 2.8GW/year
and 3.8GW/year in the parent and overall respectively in the last years (FY11E and
FY12E) of the XIth Five Year Plan. Further, this will move up to 3.9GW/year and
5.1GW/year in the parent and overall respectively in the XIIth Five Year Plan.
Competitive bidding post Jan11 - Not a medium-term concern — But it is a longerterm
negative. NTPC has already tied up 62GW and plans to tie up 75GW of
capacity under assured RoE model by Jan11. Our model factors in that NTPC
becomes a 65GW entity only by FY17E. It makes sense for NTPC to focus on the
current pipeline and not bother about competitively-bid projects. Over the next 3-
5 years NTPC should work on bringing down execution cycle/ capital costs.
tariffs vs full tax gross up earlier and lower UI volumes/ weaker UI rates are also in
the price. Hence we maintain our Buy (1L) rating on the stock. We cut our target
price to Rs210 from Rs229 earlier to factor in (1) 18-26% EPS cut and (2) roll
forward of DCF value to Mar11E from Sep10E earlier. At our target price, the stock
would trade at a P/BV multiple of 2.4x FY12E vis-à-vis 2.7x earlier (to factor in the
structural de-rating in the stock).
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