Buy NTPC – 3QFY2011 Result Update -Angel Broking

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NTPC  – 3QFY2011 Result Update

           Angel Broking maintains a Buy on NTPC with a Target Price of Rs. 230.

For 3QFY2011, on a standalone basis NTPC reported 11.0% yoy increase in

adjusted net profit to `2,319cr, aided by higher plant availability factor (PAF)

leading to higher incentives. The coal-based plants reported PAF of 93.6%, up

239bp yoy, while the gas-based plants posted PAF of 95.6%, up 251bp yoy.

Other income however, declined due to lower interest rates and redemption of

tax-saving bonds. We maintain a Buy on the stock.

Top-line growth at 19.3% yoy: NTPC’s 3QFY2011 top-line grew 19.3% yoy to

`13,964cr aided primarily by higher fuel costs, which led to higher tariffs.

However, the energy sent out (ESO) rose only by a marginal 0.8% (despite the

6.7% increase in capacity) on account of lower PLF due to the backing down by

the SEB’s. Operating profit grew 10.5% yoy to `4,300cr. Adjusted net profit

increased 11.0% yoy to `2,319cr aided by higher PAF leading to higher

incentives. Lower depreciation charges as per the new depreciation policy also

aided bottom-line growth.

Outlook and Valuation: NTPC has 33,194MW of capacity and 15,740MW is

under construction. The company has signed PPA’s for a cumulative capacity of

1,00,000MW, which provides assured off-take for its future projects. At the CMP

of `185, the stock is trading at 2.2x FY2011E and 2.0x FY2012E P/BV and `4.1cr

FY2012E EV/MW. Considering its regulated business model, assured RoE and

strong cash flow visibility, we have assigned EV/MW of `5.25cr and 2.3x P/BV on

FY2012 estimates. We maintain a Buy on the stock, with a Target Price of `230.

Investment Arguments

Capacity addition to drive future growth: NTPC, India’s largest power generating

company, currently has capacity of 33,194MW. Having the best execution

capability in the industry, management has an ambitious target of adding

22,300MW during the Eleventh Plan, thus taking its installed capacity to

50,000MW. However, the company has managed to add only 5,700MW since the

beginning of the plan period. In all, the company expects to add ~12,500MW for

the plan period, which is well below the original target.

Earnings protected by the regulated return model: NTPC, being a central public

utility (CPU), is governed by the regulated return model. The CERC’s regulations

for FY2010-14 increased the cap on RoE to 15.5% (on a pre-tax basis, grossed up

for tax) from the earlier 14% (on a post-tax basis), which is a positive for NTPC.

Going ahead, with the commissioning of new capacities, the company would fall

under the MAT bracket and will have to pay tax of 19.95% as against the marginal

tax rate of 33.2%. This would in turn suppress the company’s pre-tax RoE to 19.4%

as against the earlier 23.2%,.

NTPC to generate stable cash flows: NTPC has 85% of its overall output tied up

under the long-term PPA route (regulated returns), which ensures power off-take

and stable cash flows thereof.

Outlook and Valuation

NTPC has 33,194MW of capacity and 15,740MW is under construction. The

company has signed PPA’s for a cumulative capacity of 1,00,000MW, which

provides assured off-take for its future projects. At the CMP of `185, the stock is

trading at 2.2x FY2011E and 2.0x FY2012E P/BV and `4.1cr FY2012E EV/MW.

Considering its regulated business model, assured RoE and strong cash flow

visibility, we have assigned EV/MW of `5.25cr and 2.3x P/BV on FY2012

estimates. We maintain a Buy on the stock, with a Target Price of `230.