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CHANGE
Weak 2QFY12E generation due to disruptions
NTPC’s 2QFY12 power generation was below our expectation by 7.5% due
to unforeseen disruptions in operations at its Ramagundam and Korba
plants. We trim our FY12 EPS estimates slightly to account for the
disruption, and we believe that any weakness in the stock price is an
opportunity to buy NTPC.
CATALYST
Resumption of operations and capacity adds to drive upside
Barring near-term issues, which we expect to be out of the way soon, we
continue to like NTPC as we believe it is best positioned in terms of fuel
security at times of coal shortage, is a defensive with a strong balance
sheet and earnings visibility, and is due to add capacity of 3.6GW in FY12.
NTPC is also protected from discom defaults by sovereign guarantees.
VALUATION
Trading at trough valuations
Our DCF-based TP of INR204 is based on a WACC of 11.4% (unchanged)
and a terminal growth rate of 3% (unchanged). NTPC trades at 1.7x FY13E
P/BV – one standard deviation below its seven-year median NTM P/BV.
Key risks to our TP are delays in completion of new power plants and
lower power plant availability due to fuel shortages or forced outages
Overview of power generation in 2QFY12
NTPC’s 2QFY12 power generation from its standalone operation was lower than our estimate by 7.5% and
was down 2.4% y-y despite 7.3% y-y growth in installed capacity.
Coal-fired generation was below our estimate by 8.5% and down 1.3% y-y.
2Q is a weak quarter seasonally, as demand is lower and hydro power supplies pick up. NTPC undertakes
annual maintenance shutdowns during 2Q of every fiscal year. However, generation in 2QFY12 was
particularly hit by unforeseen factors. The company’s 2,600MW Korba power plant had to halt production
on ash disposal issues while its 2,600MW Ramagundam power plant faced coal shortages because of a
strike at its supplier – Singareni Collieries Ltd (SCCL; Not listed).
Gas/naphtha-based generation was above our expectation by 2.4% and down 10.5% y-y. In line with our
expectations, the utilisation rate for gas/naphtha-fired power plants in 2QFY12 was at 61%, down from 68%
in 2QFY11
Korba production curtailed due to fly ash disposal issues
Production at NTPC’s 2,600MW Korba power plant in Chattisgarh was affected as the company did not have
an alternative site for ash disposal after the project’s ash pond was damaged, leading to leakage of fly ash
that contaminated the nearby fields. (Fly ash is a hazardous waste powder produced when coal is burnt to
generate power.)
Power generation at Korba fell 2.1% y-y despite installed capacity going up from 2,100MW to 2,600MW.
Capacity utilization, which was 101% in 2QFY11, fell to 80% in 2QFY12.
NTPC’s earlier plans to put up a new ash disposal site for Korba were stuck due to difficulties in acquiring
land. The company is repairing the ash pond and has made temporary arrangements for disposing ash at
an alternative site. The company expects to resume normal operations at Korba by the end of this month.
NTPC believes that clean-up costs will not be material and that it can make up for the loss in availability
through the rest of the year. Note that, as per tariff regulation, NTPC can recover its fixed costs as well as
15.5% ROE only if the availability of its plants is at least 85% during a year. In case annual availability is
below 85%, NTPC recovers less than the regulated ROE of 15.5%.
Ramagundam coal supplies hit by strike at SCCL
Production at NTPC’s 2,600MW Ramagundam plant has been hit on account of a strike at Singareni
Collieries (SCCL), from where the plant sources its entire coal requirement under a Fuel Supply Agreement.
Ramagundam’s utilisation rates, which were in excess of 95% in July and August, fell to 83% in September
2011. Workers at SCCL are on strike since 13 September 2011 in support of a demand for a separate state of
Telengana carved out of certain areas of the state of Andhra Pradesh. We have no indication as to when the
strike would be called off.
SCCL could possibly declare a force majeure under its Fuel Supply Agreement with NTPC to avoid paying a
penalty for failure to supply coal.
NTPC has to maintain an annual availability of 85% for each of its power plants under its Power Purchase
Agreement (PPA), and any failure to do so leads to under-recovery of its regulated ROE. NTPC’s management
has indicated that it cannot declare force majeure under the PPA with its customers in case of coal supply
disruptions to its power projects arising from strikes at SCCL. NTPC has to source coal from alternative
sources and meet its availability targets. When the strike is called off, NTPC may be able to make up for the
supply disruptions by declaring higher availability during 3Q and 4QFY12, and thus avoid paying a penalty
for failing to meet its annual availability target of 85%. Ramagundam plant’s availability was well above the
mandated 85% until September and this would help it avoid paying penalties at the end of FY12.
Lower utilisation rate at gas plant not an issue
The decline in NTPC’s gas/naphtha-based generation is due to lower demand for expensive Liquefied
Natural Gas (LNG)-based power in the face of dwindling supplies of cheap domestic gas supplies.
Management has indicated that the availability of gas-based generation is above the mandated availability
and therefore it is recovering its regulated ROE and fixed charge, as well as earning an incentive, even
though the customer is not taking the power. Thus, lower utilisation of its gas-based power generation does
not impact NTPC’s profitability. However, revenue declines as fuel costs, which are pass-through, go down
due to lower power generation. Also NTPC loses the opportunity to earn some efficiency related gains.
NTPC’s gas-fired power plants operated at 69.8% utilisation in 1QFY12 but their availability was 90% in
1QFY12.
NTPC best positioned in terms of fuel
Barring near-term issues arising out of uncontrollable factors, we reiterate that NTPC is one of the best
positioned in the sector in terms of fuel security.
NTPC has fuel supply agreements (FSA) with Coal India (CIL, COAL IN, Not rated) and SCCL for supply of
125m tonnes of coal. As per the FSA, CIL/SCCL will have to pay a penalty if coal supplies fall below 90% of
the agreed 125m tonnes.
In addition, in May 2011 the government allocated an additional 13m tonnes of coal to NTPC’s new projects
completed in FY10 and FY11. In times of coal shortage, the government tends to prioritize supply of cheap
domestic coal supplies to NTPC’s fixed-return plants over merchant power plants as this leads to lower
power prices for the buyers, i.e the cash-strapped power distribution companies.
Thus, out of its total requirement of 160m tonnes of domestic coal, NTPC will procure 138m tonnes from CIL
and SCCL. It plans to source about 2m tonnes from e-auctions. The remaining 20m tonne shortfall is to be
bridged by importing 14m tonnes of high grade coal. NTPC already has contracts in place to import 12m
tonnes of coal.
Recall that the Ministry of Coal has taken back five coal blocks allocated to NTPC, citing poor progress in
execution. Management indicated that NTPC received a letter from the Ministry of Coal, asking it to provide
the status of progress on new power projects that were linked to the captive coal blocks that were
deallocated. Based on the progress NTPC has made on these projects, it is confident of getting back the
deallocated blocks.
Recall also that NTPC recently placed orders for 9x800MW Boiler Turbine Generator (BTG) units for its
upcoming power projects at Lara (1,600MW), Darlipali (1,600MW), Gajmara (2x800MW) and Kudgi
(3x800MW). Management has indicated that the government is likely to allocate NTPC five additional coal
blocks to ensure fuel security for these projects.
Changes in estimates
Our sales estimates are down 5.4% for FY12 and 5.3% for FY13, as we assume lower utilisation for NTPC’s
coal-fired power plants. We have reduced our assumptions for volume of power sold by 5.9% for FY12 and
6.2% for FY13.
Our EPS estimates go down only slightly by 1.9% for FY12 and 0.4% for FY13 as part of the decline in
operational profits is offset by higher other income due to higher interest that NTPC earns on cash in the
current high interest scenario. Other income accounts for 20% of our estimated FY12 profit before tax.
Valuation and TP
We value NTPC using DCF. We continue to assume a WACC of 11.4% based on a cost of equity of 13.1%, cost
of debt of 8%, tax rate of 30% and a debt-equity ratio of 31%. We retain our terminal growth rate
assumption of 3%. Key risks to our TP are delays in completion of new power plants, and lower availability
of power plants because of fuel shortages or forced outages.
NTPC currently trades at 1.7x FY13E P/BV, which is at a historical low. We believe that any weakness in the
share price on account of lower-than-expected power generation in 2QFY12 will be an opportunity to
accumulate the stock.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Opportunity to accumulate
CHANGE
Weak 2QFY12E generation due to disruptions
NTPC’s 2QFY12 power generation was below our expectation by 7.5% due
to unforeseen disruptions in operations at its Ramagundam and Korba
plants. We trim our FY12 EPS estimates slightly to account for the
disruption, and we believe that any weakness in the stock price is an
opportunity to buy NTPC.
CATALYST
Resumption of operations and capacity adds to drive upside
Barring near-term issues, which we expect to be out of the way soon, we
continue to like NTPC as we believe it is best positioned in terms of fuel
security at times of coal shortage, is a defensive with a strong balance
sheet and earnings visibility, and is due to add capacity of 3.6GW in FY12.
NTPC is also protected from discom defaults by sovereign guarantees.
VALUATION
Trading at trough valuations
Our DCF-based TP of INR204 is based on a WACC of 11.4% (unchanged)
and a terminal growth rate of 3% (unchanged). NTPC trades at 1.7x FY13E
P/BV – one standard deviation below its seven-year median NTM P/BV.
Key risks to our TP are delays in completion of new power plants and
lower power plant availability due to fuel shortages or forced outages
Overview of power generation in 2QFY12
NTPC’s 2QFY12 power generation from its standalone operation was lower than our estimate by 7.5% and
was down 2.4% y-y despite 7.3% y-y growth in installed capacity.
Coal-fired generation was below our estimate by 8.5% and down 1.3% y-y.
2Q is a weak quarter seasonally, as demand is lower and hydro power supplies pick up. NTPC undertakes
annual maintenance shutdowns during 2Q of every fiscal year. However, generation in 2QFY12 was
particularly hit by unforeseen factors. The company’s 2,600MW Korba power plant had to halt production
on ash disposal issues while its 2,600MW Ramagundam power plant faced coal shortages because of a
strike at its supplier – Singareni Collieries Ltd (SCCL; Not listed).
Gas/naphtha-based generation was above our expectation by 2.4% and down 10.5% y-y. In line with our
expectations, the utilisation rate for gas/naphtha-fired power plants in 2QFY12 was at 61%, down from 68%
in 2QFY11
Korba production curtailed due to fly ash disposal issues
Production at NTPC’s 2,600MW Korba power plant in Chattisgarh was affected as the company did not have
an alternative site for ash disposal after the project’s ash pond was damaged, leading to leakage of fly ash
that contaminated the nearby fields. (Fly ash is a hazardous waste powder produced when coal is burnt to
generate power.)
Power generation at Korba fell 2.1% y-y despite installed capacity going up from 2,100MW to 2,600MW.
Capacity utilization, which was 101% in 2QFY11, fell to 80% in 2QFY12.
NTPC’s earlier plans to put up a new ash disposal site for Korba were stuck due to difficulties in acquiring
land. The company is repairing the ash pond and has made temporary arrangements for disposing ash at
an alternative site. The company expects to resume normal operations at Korba by the end of this month.
NTPC believes that clean-up costs will not be material and that it can make up for the loss in availability
through the rest of the year. Note that, as per tariff regulation, NTPC can recover its fixed costs as well as
15.5% ROE only if the availability of its plants is at least 85% during a year. In case annual availability is
below 85%, NTPC recovers less than the regulated ROE of 15.5%.
Ramagundam coal supplies hit by strike at SCCL
Production at NTPC’s 2,600MW Ramagundam plant has been hit on account of a strike at Singareni
Collieries (SCCL), from where the plant sources its entire coal requirement under a Fuel Supply Agreement.
Ramagundam’s utilisation rates, which were in excess of 95% in July and August, fell to 83% in September
2011. Workers at SCCL are on strike since 13 September 2011 in support of a demand for a separate state of
Telengana carved out of certain areas of the state of Andhra Pradesh. We have no indication as to when the
strike would be called off.
SCCL could possibly declare a force majeure under its Fuel Supply Agreement with NTPC to avoid paying a
penalty for failure to supply coal.
NTPC has to maintain an annual availability of 85% for each of its power plants under its Power Purchase
Agreement (PPA), and any failure to do so leads to under-recovery of its regulated ROE. NTPC’s management
has indicated that it cannot declare force majeure under the PPA with its customers in case of coal supply
disruptions to its power projects arising from strikes at SCCL. NTPC has to source coal from alternative
sources and meet its availability targets. When the strike is called off, NTPC may be able to make up for the
supply disruptions by declaring higher availability during 3Q and 4QFY12, and thus avoid paying a penalty
for failing to meet its annual availability target of 85%. Ramagundam plant’s availability was well above the
mandated 85% until September and this would help it avoid paying penalties at the end of FY12.
Lower utilisation rate at gas plant not an issue
The decline in NTPC’s gas/naphtha-based generation is due to lower demand for expensive Liquefied
Natural Gas (LNG)-based power in the face of dwindling supplies of cheap domestic gas supplies.
Management has indicated that the availability of gas-based generation is above the mandated availability
and therefore it is recovering its regulated ROE and fixed charge, as well as earning an incentive, even
though the customer is not taking the power. Thus, lower utilisation of its gas-based power generation does
not impact NTPC’s profitability. However, revenue declines as fuel costs, which are pass-through, go down
due to lower power generation. Also NTPC loses the opportunity to earn some efficiency related gains.
NTPC’s gas-fired power plants operated at 69.8% utilisation in 1QFY12 but their availability was 90% in
1QFY12.
NTPC best positioned in terms of fuel
Barring near-term issues arising out of uncontrollable factors, we reiterate that NTPC is one of the best
positioned in the sector in terms of fuel security.
NTPC has fuel supply agreements (FSA) with Coal India (CIL, COAL IN, Not rated) and SCCL for supply of
125m tonnes of coal. As per the FSA, CIL/SCCL will have to pay a penalty if coal supplies fall below 90% of
the agreed 125m tonnes.
In addition, in May 2011 the government allocated an additional 13m tonnes of coal to NTPC’s new projects
completed in FY10 and FY11. In times of coal shortage, the government tends to prioritize supply of cheap
domestic coal supplies to NTPC’s fixed-return plants over merchant power plants as this leads to lower
power prices for the buyers, i.e the cash-strapped power distribution companies.
Thus, out of its total requirement of 160m tonnes of domestic coal, NTPC will procure 138m tonnes from CIL
and SCCL. It plans to source about 2m tonnes from e-auctions. The remaining 20m tonne shortfall is to be
bridged by importing 14m tonnes of high grade coal. NTPC already has contracts in place to import 12m
tonnes of coal.
Recall that the Ministry of Coal has taken back five coal blocks allocated to NTPC, citing poor progress in
execution. Management indicated that NTPC received a letter from the Ministry of Coal, asking it to provide
the status of progress on new power projects that were linked to the captive coal blocks that were
deallocated. Based on the progress NTPC has made on these projects, it is confident of getting back the
deallocated blocks.
Recall also that NTPC recently placed orders for 9x800MW Boiler Turbine Generator (BTG) units for its
upcoming power projects at Lara (1,600MW), Darlipali (1,600MW), Gajmara (2x800MW) and Kudgi
(3x800MW). Management has indicated that the government is likely to allocate NTPC five additional coal
blocks to ensure fuel security for these projects.
Changes in estimates
Our sales estimates are down 5.4% for FY12 and 5.3% for FY13, as we assume lower utilisation for NTPC’s
coal-fired power plants. We have reduced our assumptions for volume of power sold by 5.9% for FY12 and
6.2% for FY13.
Our EPS estimates go down only slightly by 1.9% for FY12 and 0.4% for FY13 as part of the decline in
operational profits is offset by higher other income due to higher interest that NTPC earns on cash in the
current high interest scenario. Other income accounts for 20% of our estimated FY12 profit before tax.
Valuation and TP
We value NTPC using DCF. We continue to assume a WACC of 11.4% based on a cost of equity of 13.1%, cost
of debt of 8%, tax rate of 30% and a debt-equity ratio of 31%. We retain our terminal growth rate
assumption of 3%. Key risks to our TP are delays in completion of new power plants, and lower availability
of power plants because of fuel shortages or forced outages.
NTPC currently trades at 1.7x FY13E P/BV, which is at a historical low. We believe that any weakness in the
share price on account of lower-than-expected power generation in 2QFY12 will be an opportunity to
accumulate the stock.
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