NTPC - Downgrade to HOLD - MAT or growth – A double-edged sword :: ICICI Sec

Visit http://indiaer.blogspot.com/ for complete details �� ��


NTPC HOLD
Downgrade from Buy
MAT or growth – A double-edged sword 
Reason for report: Recommendation change & Q2FY11 results review



We downgrade NTPC to HOLD from BUY on account of: 1) Earnings downgrade of
~4%, stemming from lower core return as NTPC becomes a MAT company (hence
RoE is grossed at a lower rate, resulting in a tax saving loss of Rs5.2bn) and 2)
Lower Unscheduled Interchange (UI) income, in line with our sectoral view of
reducing power deficit (we cut our UI revenues by Rs1-2bn for FY11-13). The
company has reported disappointing numbers for three consecutive quarters due
to variety of reasons – reducing other income, impact of MAT grossing up, higher
maintenance cost and higher operating expenses. The management’s
conservative approach is noteworthy as it rushes to sign 75GW power purchase
agreements (PPAs) before the mandatory competitive deadline sets in January ‘11
(62GW signed so far). We trim our target price to Rs217/share from Rs243/share
primarily on account of reduced earnings and increasing WACC (reduced tax
shield on debt). Given our negative sectoral view on merchant power, we continue
to prefer NTPC among the large-cap generation companies owing to regulated
cashflow and increased execution pace.
􀁦 MAT pain or growth: a double-edged sword. Owing to strong pace of capacity
additions, the higher depreciation allowed in taxation leads NTPC to become a MAT
company. Consequently, tariff regulation allows tax grossing at ~20% instead of
~33%, leading to a loss of ~Rs5.2bn (PBT level) for NTPC. In case NTPC is not able
to add as much capacity so as to become a MAT company, there is a case for derating
as the Street is placing huge faith on increased execution pace. Our detailed
tax book PBT accounting suggests, even at the most conservative project execution
schedule, NTPC will become a MAT company FY13 onwards (refer Table 1).
􀁦 Underperformance continues, third quarter back-to-back. NTPC has
underperformed the Street’s expectations for three consecutive quarters on reasons
varying from lower other income, impact of MAT, higher maintenance cost, to
increased non-pass through operating expenses. We see a significant earnings
downgrade, going forward, and our numbers are 7-12% below the consensus. The
upside earnings risk is that NTPC misses its capacity target by a wide margin and
remains a non-MAT company for FY11.
􀁦 Downgrade to HOLD. We pare the target price to Rs217/share from Rs243/share
reckoning in the earnings cut and lower tax shield in DCF. There is a reasonable
probability of the company being a non-MAT company in FY11, however there is a
structural risk of lower core RoE due to MAT beyond FY11.