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Strong business momentum in FY12/FY13
Efficiency-based incentives to drive earnings
FY12/FY13 are important milestones in NTPC's growth trajectory due to (i) targeted capacity
addition of 15GW over FY12-14 (v/s 5GW over FY09-11), (ii) BTG awards of over 16GW in
FY12 v/s 3GW over the past three years, (iii) commencement of mining operations in
CY12 and (iv) expected recovery of dues/arrears of Rs60b, which will positively impact
cash flows. Headwinds include delays in BTG awards, which would impact capacity
addition visibility beyond FY14, and fuel sourcing. We reiterate Buy given 20% earnings
CAGR over FY11-13 and attractive valuations, with a target price Rs229.
Capacity addition of 15GW over FY12-14 v/s 5GW over FY09-11
Capacity under construction is 14.7GW, and we expect a large part of these projects
to be commissioned by FY14 (many of these capacities have been under construction
since December 2007). Over the past three years, cumulative BTG awards were just
3GW, given delays in bulk tendering awards. Such delays will impact the pace of
capacity addition in FY14 and FY15, as new BTG awards in FY12 will contribute to
capacity additions only from the end of FY15 or FY16. Although some of the demandsupply
gap can be attempted to be bridged through commissioning of gas-based
capacities, it is contingent on gas allocations. In FY12, NTPC aims to award BTG
contracts for over 16GW. This is critical and delays beyond FY12 will impact Twelfth
Plan capacity addition targets.
Fuel sourcing challenges unlikely to impact returns
Of the incremental 91mt coal requirement until FY17, sourcing from Coal India and
other companies will be 56mt and the rest of the requirement will be met through
captive coal (36mt by FY17). Imported coal is becoming an unviable option for the
base load given spot rates of US$120/t+ (due to deterioration in SEB finances). This
exposes NTPC to risks of domestic coal scarcity and a recent ministry decision to
de-allocate five captive mines is not comforting. However, NTPC is better positioned
given its scale and PPA structures, which entail pass through of complete fuel costs,
and thus plant availability is unlikely to be impacted.
Efficiency based incentives to drive earnings, maintain returns
Until FY11, NTPC's incentive profile was skewed towards generation-linked incentives
(heat rate, unscheduled interchange, plant availability factor) supported by higher
operating factors. There has been negligible contribution from capacity based incentives
(interest on working capital, operations and maintenance cost savings). We calculate
that higher capacity-based incentives, particularly staff cost savings, will offset a
possible decline in generation linked incentives, enabling NTPC to maintain RoE and
returns on its core business, even for the new capacities.
Earnings CAGR of 20% over FY11-13, Buy with a target price of Rs229
We expect NTPC to deliver net earnings CAGR of 20% over FY11-13. Our earnings
estimates factor in lower operating rates for NTPC's new capacities commissioned
after March 2009 at 82-85% over FY12-13 and thus, lower overall RoEs v/s old projects
with 90% ACQ coal availability contracts. Reiterate Buy with a target price of Rs229.
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