Buy NTPC: : The elephant can dance… 􀂃 Largest utility with least risks •ICICI Securities,

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The elephant can dance…
􀂃 Largest utility with least risks
• NTPC is India’s largest utility with 34194 MW capacity (82% coal
based, rest gas based). The company has a market share of 20%
of India’s installed capacity as on March 31, 2011. NTPC has no
exposure to merchant power
• In terms of electricity generation, the company generated 220.4
billion units, thereby commanding a generation share of 30% (of
thermal power production) and 25% (of total electricity
generation)
• The company enjoys a robust regulated business model with
returns of 15.5% on core RoE
• In the IXth Plan (FY98-FY02), the company added 4200 MW. In the
Xth Plan (FY03 –07) capacity addition jumped by 1.7x to 7200 MW
• Average cost of generation per unit has increased by 6% (CAGR)
in the last two years while selling price/unit has increased by 4%
• Since the company operates on a regulated business model, the
ability to pass on increase in coal costs is 100%, which provides a
good hedge against rising fuel costs
􀂃 Going ahead
• In the 11th five year plan, we expect NTPC capacity addition to
increase by 1.5x to10,600 MW, over 10th five year plan. In 12th
five year plan, we expect the company to add 1.9x over current 5
year plan (~ 2000 MW) taking the total capacity to ~ 62500 MW.
• Due to capacity ramp, the company would require ~ 226 MTPA of
coal by FY17. In addition of fuel linkage by coal India (largest
customer), the company is expected to operationalise captive
mines and achieve coal production of 47 million tonne by FY17.
The balance ~ 27 – 30 MT will be met by imported companies
• On account of regulated nature of business and with capacity
ramp up, we forsee steady earnings growth from this company. In
addition, the company has signed 1,00,000 MW PPA with SEBs
(protected of fuel pass through and ensuring regulated return)
beyond FY17
Valuation
We believe the company is a defensive play (with reasonable valuation) in
the power sector on account of the regulated nature of the business at the
time when the sector is plagued by rising interest rates, declining
merchant power rates, backing down by SEBs (on account of losses) and
falling gas output from the KG D6 basin. Key risks (for the stock not to
outperform) would be a delay in capacity addition, lesser coal availability
for newly commissioned capacity and backing down by SEBs (leading to
loss of revenues).