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Takeaways from management meeting with investors
FY11-12 an important milestone in growth trajectory
In meetings with investors, as part of Motilal Oswal Orient India Conference in Singapore
(29, 30 November 2010), NTPC's management highlighted higher traction in various
operating parameters. FY11 and FY12 are important milestones in NTPC's growth
trajectory. This is because: (i) NTPC signed cumulative long-term PPAs for 70GW+
capacity, against 55GW as at September 2010 and the company plans to reach
75GW+ by January 2011, (ii) the company aims to award BTG contracts of 30GW+ in
the next one year v/s 2.5GW awarded over the past 2.5 years, (iii) the accelerated
pace of capacity additions (a target to add 9GW in FY11-12 v/s actual additions of
9GW over the past six years), (iv) 650MW of merchant capacity will be operational in
4QFY11, mining operations will start in CY12, and (v) NTPC expects to get approval
for the recovery of Rs60b in FY11-12 which will positively impact its cash flows.
2.5GW of projects commissioned/synchronized in the past 11 months
NTPC has commissioned/synchronized 2.5GW of capacity in the first 11 months
of CY10 v/s 750MW in the nine months to December 2009. Since August 2010,
capacity commissioned/synchronized is 1.5GW, which indicates a meaningful
ramp-up in capacity addition.
Going forward, capacity addition is likely to accelerate with the management guiding
it will commission 4.2GW in FY11 and 5.9GW in FY12. Our estimated capacity
addition target is 2.5GW and 3GW in FY11 and FY12, respectively, in line with
Central Electricity Authority (CEA) estimates. This could lead to earnings upgrades.
NTPC aims to be a 75GW company by FY17
NTPC's management reiterated its guidance to achieve 75GW capacity by FY17.
NTPC is executing 16.3GW of projects (under construction), which on the existing
installed capacity base of 33.2GW, provides visibility to ramp up to 50GW. Besides,
cumulative PPAs signed by NTPC increased from 55GW in September 2010 to
70GW by December 2010, and the management aims to tie up 75GW+ of capacity
through long-term PPAs by January 2011.
NTPC plans to award BTG contracts for almost the entire portfolio to be
commissioned in the Twelfth Plan (FY13-17), by the end of FY12. This will provide
five years of project commissioning and minimize slippages.
Expected earnings CAGR of 14% over FY10-14, core earnings growth 22%
We expect NTPC to deliver net earnings CAGR of 14% over FY10-14, led by 22%
earnings CAGR in core generation profit. Decline in other income given conversion
of cash into CWIP is leading to lower CAGR in its reported profit.
Reported RoE is expected to improve due to higher capitalization, especially in
FY14 to 18.5%, up from an expected 13.6% in FY11.
We expect NTPC to post net profit of Rs88.4b in FY11 (down 5% YoY) and
Rs102.8b in FY12 (up 16% YoY). The stock trades at a PER of 17.8x FY11E and
15.3x FY12E and P/BV of 2.3x FY11E and 2.2x FY12E. Reiterate Buy with a
target price of Rs240, an upside of 26%.
Takeaways from NTPC's management meeting with investors
FY11, FY12 a milestone in growth trajectory, Buy, target price: Rs240
In meetings with investors, as part of Motilal Oswal Orient India Conference in Singapore
(29, 30 November 2010), the NTPC management highlighted increased traction in operating
parameters. FY11-12 marks an important milestone in NTPC's growth trajectory. This is
because: (i) NTPC signed cumulative long-term PPAs for 70GW+ capacity, against 55GW
as at September 2010 and it plans to reach 75GW+ by January 2011, (ii) NTPC's aims to
award BTG contracts of 30GW+ in the next one year v/s 2.5GW awarded over the past
2.5 years, (iii) an expected accelerated pace of capacity addition (NTPC aims to add
9GW in FY11-12 v/s actual additions of 9GW over the past six years), and (iv) 650MW of
merchant capacity to be operational in 4QFY11 and mining operations to start in CY12,
leading to better returns.
A] 2.5GW of projects commissioned/synchronized in the past 11 months
NTPC commissioned/synchronized 2.5GW of capacity in the first 11 months CY10,
against just 750MW in the nine months to December 2009. Since August 2010, capacity
commissioned/synchronized is 1.5GW, indicating a meaningful ramp-up in capacity
addition. NTPC commissioned 1.5GW of capacity in YTD FY11, against our estimate
of 2.5GW and the management's estimate of 4.2GW.
Going forward, capacity addition is likely to accelerate, with the management
maintaining its guidance to commission 4.2GW in FY11 and 5.9GW in FY12. This
compares with our estimated target of 2.5GW and 3GW in FY11 and FY12, respectively,
in line with CEA estimates. This could lead to earnings upgrades.
NTPC expects to ramp up capacity addition because projects of 17GW have been
under construction since December 2007, and NTPC spent 31% of the project cost
by March 2010, which is likely to increase to 47% by the end of FY11.
B] NTPC signs 70GW of cumulative PPAs, aims to be 75GW company by FY17
NTPC's management reiterated its guidance to achieve 75GW capacity by FY17
through (1) a systematic approach towards increasing the projects under construction,
(2) expediting commissioning of projects under construction, and (3) a strategy to
mitigate fuel supply risks on incremental capacity.
NTPC is executing 16.3GW of projects (under construction), which on the existing
installed capacity base of 33.2GW, provides visibility to ramp up to 50GW. Besides,
cumulative PPAs signed by NTPC increased from 55GW in September 2010 to 70GW
by December 2010. The management aims to tie up 75GW+ of capacity through longterm
PPAs by January 2011, which is the deadline for CPSU to bid for projects on
CBT mechanism v/s ABT mechanism, based on CERC norms.
Given delays in capacity addition in the Eleventh Five Year Plan (FY08-12), the company
plans to award BTG contracts for almost the entire portfolio to be commissioned in
the Twelfth Plan (FY13-17) by the end of FY12. This will provide five years to
commission projects and minimize slippages. Consequently, NTPC plans to award
equipment orders for projects of 30GW+ (including 13GW of projects under bulk
tendering) over 12-15 months, leading to targeted operational capacity of 75GW by
FY17.
We believe FY11-12 is an important milestone in NTPC's growth trajectory. This is
because: (i) it aims to sign long-term PPAs for 75GW by January 2011 against 55GW
as at September 2010, (ii) NTPC aims to award BTG contracts of 30GW+ in the next
one year v/s 2.5GW awarded over the past 2.5 years, and (iii) the accelerated pace of
capacity additions (with a target to add 9GW in FY11-12 v/s actual additions of 9GW
over the past six years).
C] Pakri Barwadih mine to start production by CY12, MDO appointed; strategies
to mitigate fuel supply risk in place
NTPC's board accorded investment approval for the Pakri Barwadih mine development
project (stage-II environment and forest clearance received) in November 2010 at an
estimated investment of Rs37b (DER of 70:30). The management stated that the
Mine Developer-Operator (MDO) for the project had been appointed and the award
for the coal handling plant, approved.
Out of 8,000 acres of land needed for the whole project, NTPC has acquired 800
acres of the 3,600 acres required for Phase-1. NTPC will acquire land to develop
mine infrastructure, and the MDO will handle the production. Strip ratio for the mine
is 1:4 and the coal is of Grade D/E. To minimize the environmental impact, coal will be
transported to the railway siding through a 32km elevated conveyor belt. The
management indicated the mines would start commercial production in CY12. The
coal production will be used to meet any shortfall at its projects and could possibly
improve returns.
Coal requirement for 75GW operational capacity will nearly double to 265mt by FY17
(at an operating factor of 90%) v/s 136mt in FY10. NTPC has a firm contract (Fuel
Supply Agreement) with Coal India/SECL for 126mt, which fulfills 90% of its coal
requirements for 13 stations. Going forward, out of the incremental 140mt requirement
until FY17, NTPC will source 50mt of coal or 36% of the incremental requirement
from Coal India and state mining companies. The rest will be met through captive coal
(45-50mt by FY17) and imports. NTPC's Fuel Supply Agreement with Coal India for
new capacities covers 70% of the requirement. Even in the existing projects, project
re-engineering will lead to blending possibilities of 25-30% v/s 10-15% currently.
D] Arrears to boost cash flow in FY11, FY12
NTPC expects approvals for the recovery of ~Rs60b through tariff orders for its
dues/unapproved items. This comprises (1) revenue as per a new tariff order of Rs15b-
16b (accounting is done as per new TO, while tariff recovery is as per old norms,
pending TO approval), (2) Rs13b due to a wage settlement, (3) Rs13b of provisions
accounted in 2QFY11 (case in the Supreme Court) of certain items unapproved by
CERC (though approved by ATE earlier in favor of NTPC), and (4) Rs20b of past
dues pertaining to NTPC's dealings with DESU (including interest of Rs10b-12b).
These could boost NTPC's cash position and lead to a near-term increase in treasury
income.
We expect NTPC to deliver net earnings CAGR of 14% over FY10-14, led by 22%
earnings CAGR in core generation profit. Decline in other income given conversion
of cash into CWIP will lead to lower CAGR in reported profit.
Reported RoE is expected to improve due to higher capitalization, especially in FY14
to 18.5%, up from 13.6% in FY11.
We expect NTPC to post net profit of Rs88.4b in FY11 (down 5% YoY) and Rs102.8b
in FY12 (up 16% YoY). The stock trades at a PER of 17.8x FY11E and 15.3x FY12E
and P/BV of 2.3x FY11E and 2.2x FY12E. Reiterate Buy with a target price of
Rs240, an upside of 26%.
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