PGCIL has outperformed NTPC ~12% since January 2012, which we believe has largely been on account of the latter’s lower-than-anticipated earnings growth. We believe adjusted for cash equivalents and capital WIP, operating power assets are trading at an implied one-year forward P/BV of ~2.3x for NTPC and ~1.6x for PGCIL despite the latter’s FY12-14E earnings CAGR of ~23% being at 2x of NTPC. We believe the outperformance will continue, but it will be driven by higher PGCIL multiple going forward largely due to its superior execution leading to superior earnings growth, sustained monopoly (CERC approved capex of INR1tn in XII Plan) and limited risks to 17% RoE compared to NTPC’s ~25% which has downward risks.
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Fuel shortage jeopardising NTPC’s RoE
Non-availability of fuel is plaguing generation at NTPC’s stations, which is evident in declining PLFs. Erstwhile RoE of 26-28% (on regulated equity) grossed by the company was aided by efficiency gains earned on higher PLFs which are currently under pressure (evident in declining RoE). But PGCIL is insulated from such fuel related risks, limiting the downside to current RoE level.
Superior commissioning, stable RoE give PGCIL edge
Under construction/development projects have hit land acquisition, clearances roadblocks which have delayed commissioning of projects, impacting growth. These problems are much more pronounced for NTPC, noticeable in it falling commissioning-to-capex ratio, stretching its execution cycle further. While PGCIL has 70% of its net worth deployed in revenue generating assets, NPTC has ~35% of its networth deployed in operational assets. Given the pressure on RoE and delays in capacity addition, NTPC has been struggling to deliver profit growth (5.4% CAGR of FY07-12 compared to PGCIL’s 20.0%). With interest rates peaking, NTPC’s other income is also likely to decline, while on the other hand, stable RoE and healthy accretion to regulated equity will help PGCIL post impressive earnings growth going forward.
Robust execution, higher earnings, monopoly: Advantage PGCIL
Currently, the market is assigning one-year forward P/BV of 1.57x for PGCIL and 2.35x for NTPC for the regulated book with an implied growth rate of ~5.5% for the former (@ sustainable RoE of 17%) and ~7% for latter (@ sustainable RoE of 22%). Over the past one year, NTPC’s one year forward P/BV has dipped from a high of ~2.2-2.4x to the current ~1.4x, while PGCIL’s has moved within a narrow band of ~1.8–2.0x, leading to expansion of gap in P/BV multiples. Going forward, the gap is expected to remain or widen due to PGCIL’s significantly superior performance (24% earnings CAGR FY12-14E) compared to NTPC’s 10.3%. Hence, we prefer PGCIL (‘BUY/ SectorOutperformer’ with target price of INR126/share) over NTPC (‘HOLD/ Sector Underperformer’ with target price of INR157/share) in the regulated space on a possible re-rating of the regulated equity multiple for PGCIL.
Regards,
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