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

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We maintained NTPC to HOLD 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).
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 6-11% 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.

􀁦 Maintain HOLD. We maintain the target price of Rs217/share. 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.