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NTPC Ltd.
Capex delays, competition & fall in RoE - de-rating catalysts
�� Where we are
NTPC is Asia's largest IPP with a market cap of US$36bn, capacity of >32GW
(20% of India's capacity), and generates 219bu (30% of India's generation) of
power. Shift in its equipment purchase from its trusted supplier BHEL has cost
NTPC dearly. The company missed FY10 parent capex 43% by value and 70%
by MW with start of 990MW (vs plan to add 3300MW) given the stand-off with its
Russian suppliers at two of its largest projects namely, Sipat I and Barh I totaling
to 3.9GW (31% of XI plan add by parent). Capex delays and higher taxes have
started impacting its secular growth from 1QFY11. Gross generation +2% YoY
during 1HFY11 on 5% fall in gas-based generation. Lower power RoE (15.5%) on
grossing-up of tax at MAT rate vs peak rate (18.6%) in FY10, delay in capex, fall
in yield on its treasury, and higher O&M costs led to weak 1HFY11.
Where we are going
We see increased competition from Jan'11 as MoU window closes. NTPC is trying
to sign as much PPA as possible by Jan'11 to secure volume growth till FY17.
NTPC is taking new initiatives and diversification through its JVs and subs in the
fields of power trading, coal mining, generation, equipment manufacturing,
services etc. It has planned to reach 41GW vs 50GW earlier of installed capacity
during XI plan by adding 5.8GW during FY12. The Ministry has allowed NTPC to
sell 15% capacity of Korba (U-7) and Farakka (U-6) totaling to 300MW (<1%) as
merchant. It has appointed Thiess as MDO for its 15mtpa Pakri-Barwadih coal
mines by FY14E.
Investment conclusion for 2011
We maintain Underperform on 1) potential delay in capex impacting PAT/RoE
growth, 2) closure of MoU window to win projects as India moves to competitive
bidding regime, and 3) expensive valuations – P/BV of 2.4x vs Asian average of
1.8x. Benefits from regulatory policy seem priced in and potential risks could cap
stock returns here on, in our view. Delay in capex and increased competition from
Jan'11 are negative catalysts, while a pick-up in capex and higher than 15.5%
RoE on gross-up of tax at peak rate/coal capex would be a positive.
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