Citi:: NTPC FY11P: Steady Year with Capacity Additions Picking Up Pace

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NTPC (NTPC.BO) 
 FY11P: Steady Year with Capacity Additions Picking Up Pace 
 
 4QFY11P Recurring PAT in line with expectations — NTPC’s 4QFY11P PAT at
Rs25.0bn was strong and ahead of expectations. However, we believe has company
grossed up tariffs at corporate tax rate (33.2%) v/s MAT (19.9%). Adjusting for the
same Recurring PAT at Rs20.2bn is up 43% YoY (in line with CIRA @ Rs20.4bn). The
key question is how NTPC is switching between full tax and MAT on a quarterly basis?

 Plugged tariff tax loophole - Now in the numbers — One needs to remember that
this loophole was bound to get plugged some time in the future. As this gets factored in
FY11P numbers, it will not have any YoY impact on numbers from FY12E onwards.

 Poor capacity additions over past 3 years — With NTPC averaging 1.43GW/year in
the first three years (FY08-10) of XIth Five Year Plan vs promised 2-3GW/year.  Parent
additions were 0.83GW/year, leading to EPS CAGR of 4% over FY07-10.
 .....but picking up pace from FY11P — With addition of 2490MW in FY11P (Parent-
1990 & JVs - 500MW) v/s CIRA @ 2650MW. In FY12E NTPC hopes to add 4320MW
v/s CIRA @ 4980W. Parent Capex in FY11P @ Rs128bn was ahead of CIRA @
Rs120bn. NTPC expects to do capex of Rs264bn in parent & Rs44bn in JVs in FY12.
 Fuel shortages evident - But high PAFs maintained — With (1) domestic coal
supply at 126.64mn tons down 3% YoY.  (2) Lower PLFs of coal and gas plants at
88.3% and 71.8% respectively and generation growth of only 1% in FY11P. Despite this
NTPC has ramped up coal imports by 68% to 10.56mn tons and delivered coal PAF of
91.6% (v/s 91.8% in FY10) and gas PAF of 92.6% (v/s 93.1%).
 Future coal strategy — (1) New linkages for 9 new projects for 10920MW. (2) Due
diligence on 4 coal mine acquisitions in Indonesia/ Australia underway (3) From FY13,
Pakri Barwadih expected to produce 312mn tons over 27 years. (4) Signed agreements
with STC for import of 12mn tons coal and bids invited for direct import of 4 mn tons


NTPC
Company description
NTPC is India's largest power generator with 31GW of capacity (19% of installed
capacity) and generates 207bu (31% of generation). Capacity is spread across
coal-based units (24.4GW), gas-based units (3.9GW) and JV projects (2.3GW).
NTPC's output is contracted through long-term PPAs (25 years for coal-based and
15 years for gas-based) with customers (SEBs 99% of its sales). All billing to SEBs
is secured through letters of credit. It plans to be a 75GW company by FY17E.
Investment strategy
We rate NTPC Buy/Low Risk (1L). The Indian regulatory system of cost passthroughs works well and provides a defensive characteristic to NTPC's financials,
unlike other Asian generators. Capex is well-funded with low gearing (0.63x), high
cash balance of Rs188bn, strong credit rating and high annual CFO. NTPC's
market leadership (31% share of the country's power generation), competitive cost
structure, strong project-implementation skills and robust finances put the company
in a strong position to target a capacity of 75GW by FY17E. Volatility in earnings
would also be minimal - under current regulations, key costs are a pass-through,
allowing for post-tax ROE of 15.5% v/s the current 10-year GOI bond yield of
7.85%.
Valuation
Our target price for NTPC of Rs210 is based on a DCF model that uses a WACC of
9.7% and a terminal growth rate of 3%. Our assumptions are a risk-free rate of
8.5%, a market risk premium of 6% and beta of 0.9. We believe DCF is the best
way to capture the value inherent in NTPC's unprecedented capacity addition plan
against a backdrop of persistent peak and base load deficits. Further, at our Rs210
target price NTPC would trade at a P/BV of 2.4x FY12E. We see this as reasonable
given the Indian regulatory system of cost pass-throughs works well and provides a
defensive characteristic to NTPC's financials, unlike other Asian generators.
Risks
We rate NTPC Low Risk according to our quantitative risk-rating system, which
tracks 260-day historical share price volatility. Key downside risks to our target price
are: 1) NTPC's operations depend on timely availability of fuel. NTPC's gas-based
plants were hampered by poor fuel supply, resulting in sub-optimal capacity
utilization. 2) NTPC is implementing larger modules and newer technologies such
as 660MW and 800MW super critical technology and alternative fuels such as gas
and hydro more aggressively, which could place demands on its project
management and technology absorption skills. 3) UI rates are very high compared
with normal tariff rates, creating pressure from the SEBs to reduce this spot market
premium. 4) Future payment risk due to resurfacing of free power supply to
agricultural customers as a populist measure by a few states. 5) NTPC has entered
a JV with GasPatrol - France and Canoro Resources - Canada and has bid for an
oil & gas exploration block in northeast India. This raises the risk of non-discovery,
as with any exploration & production (E&P) venture.