NTPC- Significant postives to be discounted; upgrade to Accumulate: Emkay

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NTPC

Significant postives to be discounted; upgrade to Accumulate

ACCUMULATE

CMP: Rs 185                                        Target Price: Rs 204

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n     APAT of Rs21.6bn is higher than est. of Rs20.6bn due to incentives led by higher (+2% yoy) availability (PAF) despite  lower PLF (-3.5% yoy - due to back down instructions)

n     As against our view of full tax rate, grossing up is at MAT rate but Co. has indicated possibility of full tax rate in Q4FY11E. If yes, 10% increase in FY11E EPS but no change in FY12E

n     Has signed cumulative cost plus PPAs of 1,00,000 MW with first charge on collections- to emerge as winner in a scenario of (1) falling power prices & (2) deteriorating SEB financials;

n     Valuations reasonable at 2.1xFY12E Book; core ROE of 25%; Upgrade to Accumulate on (1) higher defensiveness after huge PPAs executed & (2) 10% stock correction post Q2FY11 

Higher incentives drives PAT

Higher PAF of coal (93.61% or +1.22% yoy) and gas (95.57% or +2.51% yoy) stations

has led to higher APAT of Rs21.6bn (down 4.7% yoy) versus our estimate of Rs20.6bn.

Since the overall PLFs were 3.5% lower yoy, we had assumed the same with PAF and

were expecting under recoveries in few of its plants (PLFs very low) and contrary to our

expectations it has earned incentives. The availability was higher and PLFs were lower

due to backing down instructions by SEBs driven by their financial conditions (not ready

to buy even at marginal costing of Rs1.5-1.6/unit). Though going forward, we believe an

availability of 93-94% for its coal based plants might not be possible but imported coal

supplies (16-20mn MT or ~10% of overall requirement in FY12E) is likely to support the

PAF of its current plants at around 90% (which is the 9mFY11 actual PAF).

Grossing up at MAT rate for now, could be full tax rate retrospectively in

Q4FY11E

As against our view of full tax rate, grossing up is at MAT rate but Co. has indicated

possibility of full tax rate in Q4FY11E. Just to recollect, NTPC had changed the grossing

up to MAT rate from earlier full tax rate starting Q1FY11 - in anticipation of MAT rate

applicability in FY11E. This was based on its assessment of project completions. We

believe that the company is running short of its target on project commissioning (now

the target is 3,150MW) which might result in NTPC falling under full tax in FY11E.

Though this might increase our FY11E earnings by ~10% but we believe that NTPC in

all probabilities is likely to fall under MAT rate in FY12E - thus no change in FY12E

earnings, will take a call after execution (build in about 4000MW in Q3FY11-FY12E)

ramp up.

PPAs of 100000MW, first charge on collections, coal security of 90% and

strong balance sheet - NTPC to emerge as winner

NTPC has signed cumulative cost plus PPAs of 1,00,000 MW with first charge on

collections (tripartite agreement upto FY16E and thereafter first charge) - a big plus in a

scenario of (1) falling power prices & (2) deteriorating SEB financials. This offers higher

defensiveness & sets aside concerns on its growth in competitive bidding regime. Also the

company has 90% domestic fuel security for its operational plants and about 80% security

for its under constructions plants – another big plus in a scenario of likely coal shortages.

With coal, PPAs and strong balance sheet (cash and cash equivalents of Rs280bn) at its

disposal, NTPC we believe is likely to emerge as the biggest winner in a scenario of

consolidations/mergers two years down the line. Two years down the line, we see (1) most

of the private developers rushing for PPAs (likely merchant prices Rs2.7/unit), (2) SEBs

badly hit resorting to restrictions, caps, defaults, delays and (3) developers having problems

in debt servicing. All this could result in addressing the key concern for NTPC, which is

execution (to pick up as it is in FY12E) as it is likely to be the company sought after for (1)

JVs, (2) consolidations and (3) plant buy outs.

Upgrade to Accumulate on increasing defensiveness and reasonable

valuations

All the above positives offer higher defensiveness & are likely to set aside concerns on its

growth (1) on slow execution and (2) in competitive bidding regime. Valuations are more

reasonable at 2.1xFY12E book after ~10% correction in its stock price since Q2FY11. We

upgrade the stock to Accumulate ratings and increase the core book multiple to 2.6x 1yr

fwd (21% equity IRR/ 10 yr bond yield). Target Rs204. We would like to highlight that we

are valuing the company on FY12E Book as of now if we roll over to FY13E, there would be

a further upside of about Rs15/Share.