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NTPC (NTPC.BO)
Downgrade to Hold: Derating Could Be Structural
Downgrade to Hold (2L) — As NTPC is facing structural issues that have lowered
RoEs from 15.9% in FY08 to 13.4% in FY11, and this could inch lower to ~ 13% going
forward. NTPC has added only 1.7GW/year over FY08-11 vs. the promised 3GW/year.
We expect addition of 2.8GW in FY12E vs. guidance of 4.3GW. Further, XIIth Plan
additions could be 2GW/year (vs. 3.9GW/year) for parent and 2.9GW/year (vs.
5.1GW/year) overall. This has led to weak YoY generation growth starting 3Q08; in
fact, in 4Q11/1Q12 generation declined YoY for the first time in 8 years (besides 1Q09).
Target price cut to Rs180 — To factor in (1) 5-11% EPS cut over FY12-13E; (2) roll
forward of DCF value to Dec11E (Mar11E); (3) roll forward of multiple on subsidiaries
and power bonds to Dec12E (Mar12E). NTPC has underperformed the BSE Sensex by
7% and outperformed the India Electric Utilities average by 19% over the last year.
Besides slow additions RoEs impacted by — (1) Decline in PLF of power plants since
FY11. As PLF comes off, cost savings for operating plants below normative station heat
rate are reduced; (2) coal shortages imply lower PAF, which reduces the PAF incentives;
and (3) lower UI volume growth and weaker merchant prices lower the UI upside.
Tax rate in tariffs continues to be a significant risk — If NTPC does achieve higher
additions of 3-4GW+ it would then come under MAT, and tariffs would be grossed up at
MAT (vs. full tax currently which is –ve). As long as additions are lower, tax gross up
would happen at full tax. In FY11 given that NTPC added lower capacity than expected,
it did not lose ~Rs9.7b of profits and cash flows. But this remains a key risk ahead.
NTPC de-rating could be structural – PGCIL looks more attractive— Investors
could argue that NTPC’s P/BV multiples are close to 1 SD below the historical mean
and one should be buying the stock. Yet, NTPC’s P/BV multiples have de-rated as the
company’s RoEs have come off. We believe investors are better off buying PGCIL,
which is trading 1 SD below the historical mean and where RoEs have held up firmly.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
NTPC (NTPC.BO)
Downgrade to Hold: Derating Could Be Structural
Downgrade to Hold (2L) — As NTPC is facing structural issues that have lowered
RoEs from 15.9% in FY08 to 13.4% in FY11, and this could inch lower to ~ 13% going
forward. NTPC has added only 1.7GW/year over FY08-11 vs. the promised 3GW/year.
We expect addition of 2.8GW in FY12E vs. guidance of 4.3GW. Further, XIIth Plan
additions could be 2GW/year (vs. 3.9GW/year) for parent and 2.9GW/year (vs.
5.1GW/year) overall. This has led to weak YoY generation growth starting 3Q08; in
fact, in 4Q11/1Q12 generation declined YoY for the first time in 8 years (besides 1Q09).
Target price cut to Rs180 — To factor in (1) 5-11% EPS cut over FY12-13E; (2) roll
forward of DCF value to Dec11E (Mar11E); (3) roll forward of multiple on subsidiaries
and power bonds to Dec12E (Mar12E). NTPC has underperformed the BSE Sensex by
7% and outperformed the India Electric Utilities average by 19% over the last year.
Besides slow additions RoEs impacted by — (1) Decline in PLF of power plants since
FY11. As PLF comes off, cost savings for operating plants below normative station heat
rate are reduced; (2) coal shortages imply lower PAF, which reduces the PAF incentives;
and (3) lower UI volume growth and weaker merchant prices lower the UI upside.
Tax rate in tariffs continues to be a significant risk — If NTPC does achieve higher
additions of 3-4GW+ it would then come under MAT, and tariffs would be grossed up at
MAT (vs. full tax currently which is –ve). As long as additions are lower, tax gross up
would happen at full tax. In FY11 given that NTPC added lower capacity than expected,
it did not lose ~Rs9.7b of profits and cash flows. But this remains a key risk ahead.
NTPC de-rating could be structural – PGCIL looks more attractive— Investors
could argue that NTPC’s P/BV multiples are close to 1 SD below the historical mean
and one should be buying the stock. Yet, NTPC’s P/BV multiples have de-rated as the
company’s RoEs have come off. We believe investors are better off buying PGCIL,
which is trading 1 SD below the historical mean and where RoEs have held up firmly.
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