Q2FY15 Result Review - NTPC Ltd :: HDFC Securities

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Revenues up 1.9% y-o-y and down 8.3% q-o-q
In Q2FY15, Net Sales was Rs 16582.4 cr, up 1.9% y-o-y and down 8.3% q-o-q. Sales during the quarter include Rs. 90.10 cr (corresponding previous quarter Rs. 117.5 cr) pertaining to
previous years recognized based on the orders issued by the CERC/Appellate Tribunal for Electricity (APTEL). Sales also include (-) Rs. 605.02 cr (corresponding previous quarter is Nil) on
account of Income tax refundable to / recoverable from the beneficiaries as per Regulations, 2004. It also includes Rs. 29.5 cr (corresponding previous quarter Rs. 18.9 cr) on account of
deferred tax materialized which is recoverable from beneficiaries as per Regulations, 2014.
Gross generation has marginally gone up 1.7% y-o-y but down by 12.2% y-o-y to 55.4 bn units driven primarily by capacity addition. Energy sent out also has marginally gone up 1.6% y-o-y
but down 12.6% q-o-q to 51.5 bn units. Average realizations have been flat at Rs 3.2/kwh.

Revenues up 1.9% y-o-y and down 8.3% q-o-q
In Q2FY15, Net Sales was Rs 16582.4 cr, up 1.9% y-o-y and down 8.3% q-o-q. Sales during the quarter include Rs. 90.10 cr (corresponding previous quarter Rs. 117.5 cr) pertaining to
previous years recognized based on the orders issued by the CERC/Appellate Tribunal for Electricity (APTEL). Sales also include (-) Rs. 605.02 cr (corresponding previous quarter is Nil) on
account of Income tax refundable to / recoverable from the beneficiaries as per Regulations, 2004. It also includes Rs. 29.5 cr (corresponding previous quarter Rs. 18.9 cr) on account of
deferred tax materialized which is recoverable from beneficiaries as per Regulations, 2014.
Gross generation has marginally gone up 1.7% y-o-y but down by 12.2% y-o-y to 55.4 bn units driven primarily by capacity addition. Energy sent out also has marginally gone up 1.6% y-o-y
but down 12.6% q-o-q to 51.5 bn units. Average realizations have been flat at Rs 3.2/kwh.

Valuation & Outlook
NTPC’s principal business is generation and sale of bulk power. Other business includes providing consultancy, project management and supervision, oil and gas exploration and coal
mining. It currently owns and operates 41.9 GW of generation capacity (commercial) at group level and 36.5GW at standalone level. NTPC is a leader in the power generation segment
contributing nearly 25.6% to India’s electricity generation. Its regulated business model offers a favorable risk reward vis-à-vis private IPPs who face the risk of significant RoE
compression. However, NTPC has performed below market expectations over the past few years. The main areas of concern include timely supply of equipment, execution of capex plans
and availability of fuel. Further the new stricter CERC norms have impacted its bottom line affecting its near term growth outlook.
During Q2FY15, NTPC reported Net Sales of Rs 16582.4 cr, down 1.9% y-o-y and down 8.3% q-o-q while Reported PAT was down 16.9% y-o-y to Rs 2071.6 cr. Operating margins were
under pressure and have declined to 19.4% in Q2FY15 from 26.0% in Q2FY14 and was lat on QoQ basis (19.3% in Q1FY15). PLFs & PAFs for coal based stations were lower y-o-y while for
gas based stations, PLF improved by 5.0% and PAF improved by 2.2% y-o-y.
NTPC is currently trading at about 1.3x its FY16 BV of Rs 111.7. NTPC’s business model is changing structurally and the core ROE is under pressure having consistently moderated over last
4 years from the peak of 28% in FY10 to 13% in FY14. Although the generation growth has improved in the second quarter, the company's operational profitability has bore the brunt of
impact of new tariff norms which have become applicable from April 2014. These norms have tightened the operating efficiency norms needed to recover fuel costs. As it stands today,
not all of NTPC's plants are in a position to meet these norms thus there is an under-recovery in fuel costs. Apart from this, sub-optimal PLF has meant that the generation based
incentives have been lower. Although, NTPC has contested the CERC norms in courts, the outcome is uncertain. NTPC’s RoE has been negatively impacted by 2014 tariff regulations.
Average PLF of coal based stations for the quarter fell to 73%, down 300bps YoY due to a combination of yearly maintenance and poor coal availability.
We are maintaining FY15 and FY16 estimates (though FY16 topline may be underachieved). Near term outlook of the stock remains tentative. Earnings growth is expected to be subdued
in FY15 while gradual pick up may happen from FY16 onwards. As other power companies become expensive, this will seem cheaper in terms of P/BV and P/E. With an improvement in
power demand and coal availability, PLF should increase from current low levels, leading to higher incentives but that may take time give the structural issues facing power sector.
Nevertheless, NTPC remains a key beneficiary once these issues are sorted out so we remain positive for the long term. However in the short-term company could face some headwinds
because of the stricter CERC norms. Under the new regulation, NTPC’s return on invested equity will likely come down from 22-23% previously. The impact on IRR is even more severe at
just above 12%, only marginally above the cost of equity capital (12% cost of equity).
It will be interesting to see whether NTPC sticks to its capacity addition plans, given the lower offtake from SEBs due to poor financial health of SEBs; significant increase in the pace of
capacity addition in India due to aggressive capacity addition by the private sector; and likely shortfall in cash flows given the decline in NTPC’s RoE from the new tariff norms.
In our result update Q1FY15 dated Aug 07, 2014 we had stated that investors could buy the stock in the band of Rs 129-Rs 134 (~1.15x FY15E PBV & 11.0x EPS-~1.20x FY16E PBV & 11.55x
FY16E EPS) for a target price of Rs 151 (1.35xFY16 BV & ~13xFY16E EPS) in the next one quarter. Post the issue of the report, the stock touched a low of Rs 131.8 on 17th September 2014
and a high of Rs 150.9 on Oct 31 2014, thus almost meeting our target.
We feel investors could look at buying the stock on dips to Rs 132- Rs 136 (1.2x FY16 BV & 11.3-11.6x FY16E EPS) for a target of Rs.161 (1.4xFY16 BV & ~14xFY16E EPS).

LINK
http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3009588