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�� Headline numbers in line with estimates; Q4FY11 tax could surprise
NTPC’s Q3FY11 earnings adjusted for extraordinaries (depreciation policy, forex,
tax and prior year sales) were flat at ~INR 23 bn against INR 21 bn last year.
Management guided for generation loss of ~3 bn units during Q3FY11 due to
back down requirements by customers. The company has paid tax at MAT rate in
FY11 so far. However, depending on the commercialisation schedule of upcoming
plants, NTPC may fall under the full tax rate in FY11 which could result in
reversal of some tax payments in Q4FY11.
�� Other highlights: Operations and capex
Coal-based stations continued with high PAF of 94%, while gas station PAF
improved to 95% during the quarter, which earned additional efficiency gains as
per norms. Management is confident of the captive coal mine being operational
by FY13 with initial target of 2 mt and scaling up to ~15 mt by FY16E.
�� Capacity addition to pick up in FY12; 150 MW merchant capacity
NTPC has till date added ~1 GW in FY11 (against target of 3 GW), while
management has guided for another ~1.5 GW to be added by March 2011 and
~4 GW in FY12. NTPC has received approvals for selling 15% of its capacity at
Korba and Farakka (500 MW each) on merchant basis.
�� 100 GW by FY20-22 as per CERC norms; need to ensure coal supplies
Management expects to have ~100 GW operational by the next ~8 years, which
will earn regulated returns (currently earning ~22-23% project RoEs). It also
guided that the company will continue to competitively bid for projects despite a
robust project portfolio. Management guided that for its existing capacities it has
signed fuel supply agreements for up to 90% of coal with Coal India. However,
for upcoming capacities it has only signed LoA for up to 80% (FSA yet to be
signed). Since under current norms fuel risk is borne by the generator, NTPC will
have to ensure adequate coal supplies.
�� Outlook and valuations: Earnings under pressure; maintain ‘HOLD’
We are introducing FY13 estimates and have also rolled over valuations similarly.
We are also incorporating higher Ke in line with changes in macro assumptions.
At CMP of INR 185 the stock is trading at 2.1x FY12E and 1.9x FY13E BV. We
maintain ‘HOLD’ recommendation and rate it ‘Sector Performer’ on relative
return basis.
Company Description
NTPC, setup in 1975, is India’s largest power generation company with 30,644 MW
capacity (including 2,294 MW from JV’s). The company plans to expand its capacity to 75
GW by 2017E and 132 GW by 2028. In addition to generation, NTPC also provides
consultancy services to entities in the power domain. A subsidiary, NTPC Vidyut Vyapar
Nigam, is engaged in power trading, while the company has also entered into JVs for
different businesses—with Singareni Collieries for coal mining, BHEL for equipment
manufacturing, and Transformers & Electricals Kerala (TELK) for repairs and
maintenance.
Investment Theme
• CERC norms: The new norm is unlikely to impact NTPC’s RoE significantly as
despite tightening of some parameters the company would continue to earn ~22-
23% on its project equity and therefore certainty of earnings remains.
• Timely execution of capex: Timely execution of capex could result in an upside
from the estimated earnings. Compared to only 4.6 GW capacity additions over
FY08-Jan 2011, management is guiding ~13 GW addition (our forecasts ~8 GW) to
be added over the next two years. If this momentum in capex is maintained it would
warrant a hike in growth assumptions
• Huge cash balance: NTPC is adequately funded to finance its huge expansion plan
for the next decade. As of December 2010, the company had a cash balance of ~
INR 198 bn and another ~ INR 98 bn in state electricity bonds which would be
redeemed by 2016. Since debt repayment is a component in the tariff, hence, we
believe these cash surplus would prove very useful for future capex. Also, any
inorganic growth opportunity would be value accretive.
• Upsides from coal mining: We have assumed NTPC to pass on the price benefits
from coal mining to its power business. However, if regulations permit market
related pricing for coal, then it could provide further upside.
Key Risks
• Delay in execution and rising cost pressures: NTPC has been affected by delay
in commercialisation of some of its plants due to factors beyond its control. In
addition, increasing cost pressures could impact efficiency gains in a competitive
environment.
• Shortage of Coal, EPC and equipment: NTPC’s recent expansion plans have been
delayed due to delays from its EPC and equipment suppliers. With an imminent
domestic coal shortage due to limitations on Coal India, there is a plausible risk of
NTPC’s new capacities having sub optimal PAF’s unless their imports are increased.
• PAF: NTPC operated its coal units at ~91% PAF and gas-based units at ~90.6% in
FY10. The company has been facing fuel issues which (along with annual
maintenance) has impacted overall optimal electricity generation. A fall in PAF
directly impacts incentive earnings
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
�� Headline numbers in line with estimates; Q4FY11 tax could surprise
NTPC’s Q3FY11 earnings adjusted for extraordinaries (depreciation policy, forex,
tax and prior year sales) were flat at ~INR 23 bn against INR 21 bn last year.
Management guided for generation loss of ~3 bn units during Q3FY11 due to
back down requirements by customers. The company has paid tax at MAT rate in
FY11 so far. However, depending on the commercialisation schedule of upcoming
plants, NTPC may fall under the full tax rate in FY11 which could result in
reversal of some tax payments in Q4FY11.
�� Other highlights: Operations and capex
Coal-based stations continued with high PAF of 94%, while gas station PAF
improved to 95% during the quarter, which earned additional efficiency gains as
per norms. Management is confident of the captive coal mine being operational
by FY13 with initial target of 2 mt and scaling up to ~15 mt by FY16E.
�� Capacity addition to pick up in FY12; 150 MW merchant capacity
NTPC has till date added ~1 GW in FY11 (against target of 3 GW), while
management has guided for another ~1.5 GW to be added by March 2011 and
~4 GW in FY12. NTPC has received approvals for selling 15% of its capacity at
Korba and Farakka (500 MW each) on merchant basis.
�� 100 GW by FY20-22 as per CERC norms; need to ensure coal supplies
Management expects to have ~100 GW operational by the next ~8 years, which
will earn regulated returns (currently earning ~22-23% project RoEs). It also
guided that the company will continue to competitively bid for projects despite a
robust project portfolio. Management guided that for its existing capacities it has
signed fuel supply agreements for up to 90% of coal with Coal India. However,
for upcoming capacities it has only signed LoA for up to 80% (FSA yet to be
signed). Since under current norms fuel risk is borne by the generator, NTPC will
have to ensure adequate coal supplies.
�� Outlook and valuations: Earnings under pressure; maintain ‘HOLD’
We are introducing FY13 estimates and have also rolled over valuations similarly.
We are also incorporating higher Ke in line with changes in macro assumptions.
At CMP of INR 185 the stock is trading at 2.1x FY12E and 1.9x FY13E BV. We
maintain ‘HOLD’ recommendation and rate it ‘Sector Performer’ on relative
return basis.
Company Description
NTPC, setup in 1975, is India’s largest power generation company with 30,644 MW
capacity (including 2,294 MW from JV’s). The company plans to expand its capacity to 75
GW by 2017E and 132 GW by 2028. In addition to generation, NTPC also provides
consultancy services to entities in the power domain. A subsidiary, NTPC Vidyut Vyapar
Nigam, is engaged in power trading, while the company has also entered into JVs for
different businesses—with Singareni Collieries for coal mining, BHEL for equipment
manufacturing, and Transformers & Electricals Kerala (TELK) for repairs and
maintenance.
Investment Theme
• CERC norms: The new norm is unlikely to impact NTPC’s RoE significantly as
despite tightening of some parameters the company would continue to earn ~22-
23% on its project equity and therefore certainty of earnings remains.
• Timely execution of capex: Timely execution of capex could result in an upside
from the estimated earnings. Compared to only 4.6 GW capacity additions over
FY08-Jan 2011, management is guiding ~13 GW addition (our forecasts ~8 GW) to
be added over the next two years. If this momentum in capex is maintained it would
warrant a hike in growth assumptions
• Huge cash balance: NTPC is adequately funded to finance its huge expansion plan
for the next decade. As of December 2010, the company had a cash balance of ~
INR 198 bn and another ~ INR 98 bn in state electricity bonds which would be
redeemed by 2016. Since debt repayment is a component in the tariff, hence, we
believe these cash surplus would prove very useful for future capex. Also, any
inorganic growth opportunity would be value accretive.
• Upsides from coal mining: We have assumed NTPC to pass on the price benefits
from coal mining to its power business. However, if regulations permit market
related pricing for coal, then it could provide further upside.
Key Risks
• Delay in execution and rising cost pressures: NTPC has been affected by delay
in commercialisation of some of its plants due to factors beyond its control. In
addition, increasing cost pressures could impact efficiency gains in a competitive
environment.
• Shortage of Coal, EPC and equipment: NTPC’s recent expansion plans have been
delayed due to delays from its EPC and equipment suppliers. With an imminent
domestic coal shortage due to limitations on Coal India, there is a plausible risk of
NTPC’s new capacities having sub optimal PAF’s unless their imports are increased.
• PAF: NTPC operated its coal units at ~91% PAF and gas-based units at ~90.6% in
FY10. The company has been facing fuel issues which (along with annual
maintenance) has impacted overall optimal electricity generation. A fall in PAF
directly impacts incentive earnings
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