Buy NTPC:: Defensive Stock with High Fuel Security & Assured RoE:: Karvy

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


Defensive Stock with High Fuel Security &
Assured RoE
National Thermal Power Corporation (NTPC) – India’s largest power
generation company – scores well as a defensive growth option with
adequate fuel security, capacity expansion, assured RoE, strong balance
sheet, high earnings visibility, and lowest cost structure.
Fuel Security at its Best – Least Vulnerable to Coal Deficit & Rising Coal
Prices
NTPC offers some of the best fuel security for its projects in a scenario
marked with coal deficit, and rising coal prices. Despite our assumption of
significant delays, NTPC expects that the captive mines would produce 47
MTPA of coal by FY17E. NTPC operates (100%) under regulated business
model, which entitles the Company to pass on fuel cost to protect from
rising coal prices.
Less Capacity Additions from 11th Plan Target – Expect Capacity to Ramp
Up
Out of capacity addition plan of 23GW during the 11th Plan, NTPC has
been able to add only 6GW in the first four years (FY08-11). We expect
12,710MW addition of consolidated capacity during 11th Plan leading to
47% slippage from the capacity addition target. However, we believe the
slippage in the capacity addition has already been priced-in for NTPC.
Going forward, we expect NTPC would add 20GW during FY12-15E.
Regulated RoE with Steady Cash-Flow – Core RoE Higher Than CERC
Norm
NTPC’s pre-tax RoE of 21-27% is one of the highest due to operational
efficiency and higher incentives with less risk of higher fuel prices. We
expect regulated equity to grow from Rs. 272 bn to Rs. 420 bn by FY13E.
We forecast core RoE of 20-21% for FY12-15E.
Robust Balance Sheet with Strong Operational Cash-flows
NTPC’s balance sheet is strong enough to fund ongoing capex plans, as it
plans to spend Rs. 970 bn during FY12-15E period. Its capex would be
funded from internal accruals and debt. Given the strength of operational
performance and healthy balance sheet, we expect the funding for the
ensuing projects would not be a major issue for NTPC in comparison to
private players.
Outlook & Valuation
At 13.0x FY13E P/E and 1.8x FY13E P/B, NTPC trades at a 20-25% discount
to the average multiples of its domestic peers. In our view, adequate fuel
security and RoE as compared to IPPs, and strong balance sheet command
a premium for NTPC’s valuation relative to the average multiples of its
peer group. At our price target of Rs. 219, the stock would trade at 16x 1-
year forward P/E and 2.1x 1-year forward P/B.
We initiate coverage on the stock with “BUY” recommendation.