NTPC -Offers value following recent share-price fall; Daiwa

Visit http://indiaer.blogspot.com/ for complete details �� ��


NTPC (NATP IN) Rating:3
Offers value following recent share-price fall; major negatives look factored in
Utilities: India
Target price: Rs210.00



What has changed?
• NTPC’s share price has declined by 14% since its 2Q FY11 results announcement
on 26 October 2010, reflecting its decision to gross up its ROE at a reduced tax rate
and other concerns. It offers 19% upside potential to our target price.


Impact
• Why has the share price fallen? We see two main reasons for this. 1) As the
proportion of the company’s new plants/expansion projects is expected to be
greater than that of its old plants, NTPC has decided to gross up its normative
ROE at a rate of Minimum Alternate Tax (MAT) of 19.9%, compared with the
previous corporate tax rate of 33%. 2) Unscheduled Interchange (UI) charge
rates have declined from about Rs4/Kwh for FY10 to Rs2-2.5/Kwh currently,
affecting the company’s earnings.

• Our earnings forecasts revised down. We have incorporated these changes
into our forecasts and as a result have revised down our EPS forecasts for
FY11, FY12 and FY13 by 12%, 12% and 7%, respectively.

Valuation
• After adjusting for our earnings-forecast revisions and including the value of newer
assets, our SOTP-based six-month target price remains unchanged at Rs210. We
have now included the value of NTPC’s investments in its joint-venture plants,
since the capacity at the joint ventures is expected to increase from 2.8GW
currently to 6.8GW by FY13 on our forecasts. We have also included the value of
NTPC’s proposed investments of Rs30bn in its captive mine at Pakri Barwadih.
Catalysts and action

• We believe NTPC’s current share price factors in the negatives. Our forecasts for
NPTC’s capacity additions are below management’s guidance, as we forecast 3GW
for FY11, 3.3GW for FY12 and 4.6GW for FY13. We also believe NTPC’s
existing capacity is better-placed than that of its peers in terms of coal availability
given that almost all of it is based on the current fuel-supply agreement with Coal
India (Not rated).

• However, we maintain our 3 (Hold) rating. The current share price implies 19%
upside potential to our Rs210 target price. NTPC trades currently at a PBR of 2x
on our FY12 BVPS forecast of Rs90.