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NTPC (NTPC IN)
N: Weak 2Q12 operational performance
Plant load factor continues to decline, due to demand as well
fuel shortage in line with our expectations
Bank lending squeeze to SEBs showing, increasing NTPC’s
collection days, still within due date, but we will monitor this
for the next two to three quarters
Better placed on fuel, priority allocation as well cost is passthrough; progress on captive mine is positive; we maintain our
Neutral rating and INR194 target price
Plant load factor (PLF) falls 443bps in fiscal Q2, should pick up in 2H but remain below
FY11 levels: NTPC reported a decline in generation of 3% yoy to 50.9bn units, 3% below our
estimate, as PLF fell 443bps to 78.4%. The company explained this was due to low demand
for thermal generation, as low-cost hydro and nuclear generation was available in Q2.
Plant availability factor (PAF) at 83.4% is down 300bps, in line with our expectation:
The company attributed this largely to planned outages in line with low demand and less to
coal shortages at its plants (by 3.8%). However, we see this as a sign of increasing fuel
pressure at the power plants, which appears unlikely to improve over the next 1-2 years.
Bank lending squeeze started in Q2 to State Electricity Boards (SEBs) showing: NTPC’s
collection days increased to 50-65 in Q2 (previously 20-35 days). Though it continues to
receive payments within due dates, we will monitor this over the next 2-3 quarters. A credit
squeeze would likely improve the financial health of SEBs, as consumer tariffs may continue
to be raised in line with our view (tariff revisions continue in many states; see Exhibit 5).
Better placed on fuel: NTPC is better placed, compared to other IPPs, as its significant
capacity has fuel tied up, with priority allocation, and given 100% cost-plus model, any
increase is pass-through to customers. Progress on NTPC’s captive Pakribarwadih mine
with payment for land made for c4,200 acres, including possession of c2,500 acres, should
help it start production in FY13.
The company maintains its generation target of 235bn units for FY12, implying 15%
growth yoy and c92% PLF (coal) in 2H, compared to a decline of 2% yoy and 82.6% PLF
in 1H. We view this as challenging, but still maintain our 234.8bn-unit estimate for FY12.
No changes to our estimates, maintain INR194 target price, and reiterate Neutral rating:
We use DCF to value NTPC, and we apply a WACC of 10.3% to derive our 12-month target
price. Key upside risks are faster-than-expected execution of projects under construction and
upside from profits from captive coal mines. Downside risks include non-availability of fuel,
impacting operations and efficiency gains.
2QFY12 results highlights
Reported profit boosted by one-offs: NTPC reported net profit of INR24.2bn, up 15% yoy, and above
our estimate of INR18.9bn, boosted by accounting one-offs in Q2 related to previous years, such as prior
period adjustments (INR1.6bn), provision for interest charges written back (INR1.9bn), interest
receivable from customers on favourable tariff revision orders (INR1.1bn), and fixed charges largely
related to grossing up of ROE at the corporate tax rate instead of MAT (INR2.4bn), while deferred tax in
Q2 was higher by INR0.7bn related to the previous year. Thus, adjusted net profit of INR18.0bn was up
2% yoy, or 4.5% below our estimate.
Fuel cost increase: Increase in net sales was largely due to increase in fuel cost, which is a pass-through
to customers. The weighted average cost of coal increased to INR2650/ton in Q2 from INR2100/MT.
PLF fell c443bps in Q2: NTPC reported a decline in generation of 3% yoy to 50.9bn units, or 3% below our
estimate, as PLF decreased 443bps to 78.4%. The company explained this was due to low demand for thermal
generation, as low-cost hydro and nuclear generation was available in Q2.
PAF was down 306bps at 83.4%, in line with our expectation: The company attributed this largely to
planned outages in line with low demand and less to coal shortage at its plants. The loss in generation due to
coal shortage in Q2 was c1.94bn units (c3.8% of total generation in Q2).
Collection days increased to 50-65 in Q2 (previously 20-35 days): The company indicated that in the
past, c60-70% of the collection was received on the first day of billing availing a cash discount, but due to
a credit squeeze by banks, this has declined to 30-40%. Similarly, payments received on last day of the
due date increased to 20-25% from 5-10% earlier.
Progress at the company’s captive Pakribarwadih mine: Payment for land made for c4,200 acres,
including possession of c2,500 acres, should help it start production in FY13.
Valuation
We use a DCF methodology to value NTPC and apply a WACC of 10.3% – assuming a cost of debt of
8.7%, cost of equity of 10.9%, beta of 0.9, and terminal growth of 4% – to derive our 12-month target
price of INR194.
Under our research model, for stocks without a volatility indicator, the Neutral band is 5ppts above and
below the hurdle rate for Indian stocks of 11%, or 6-16% around the current share price. Our target price
implies a potential return of 11.3%, which is within the Neutral band; hence, we reiterate our Neutral
rating on the stock. Potential return equals the percentage difference between the current share price and
the target price, including the forecast dividend yield when indicated.
Our target price of INR194 implies a FY13e PB of 2.0x versus the current FY12e PB of 1.9x, and an FY13e
PE of 15.7x versus the current FY12e PE of 15.6x.
Risks
Key upside risks, in our view, are faster-than-expected execution of projects under construction and
upside from profits from captive coal mines. Downside risks that we see include non-availability of fuel
impacting its operations and efficiency gains.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
NTPC (NTPC IN)
N: Weak 2Q12 operational performance
Plant load factor continues to decline, due to demand as well
fuel shortage in line with our expectations
Bank lending squeeze to SEBs showing, increasing NTPC’s
collection days, still within due date, but we will monitor this
for the next two to three quarters
Better placed on fuel, priority allocation as well cost is passthrough; progress on captive mine is positive; we maintain our
Neutral rating and INR194 target price
Plant load factor (PLF) falls 443bps in fiscal Q2, should pick up in 2H but remain below
FY11 levels: NTPC reported a decline in generation of 3% yoy to 50.9bn units, 3% below our
estimate, as PLF fell 443bps to 78.4%. The company explained this was due to low demand
for thermal generation, as low-cost hydro and nuclear generation was available in Q2.
Plant availability factor (PAF) at 83.4% is down 300bps, in line with our expectation:
The company attributed this largely to planned outages in line with low demand and less to
coal shortages at its plants (by 3.8%). However, we see this as a sign of increasing fuel
pressure at the power plants, which appears unlikely to improve over the next 1-2 years.
Bank lending squeeze started in Q2 to State Electricity Boards (SEBs) showing: NTPC’s
collection days increased to 50-65 in Q2 (previously 20-35 days). Though it continues to
receive payments within due dates, we will monitor this over the next 2-3 quarters. A credit
squeeze would likely improve the financial health of SEBs, as consumer tariffs may continue
to be raised in line with our view (tariff revisions continue in many states; see Exhibit 5).
Better placed on fuel: NTPC is better placed, compared to other IPPs, as its significant
capacity has fuel tied up, with priority allocation, and given 100% cost-plus model, any
increase is pass-through to customers. Progress on NTPC’s captive Pakribarwadih mine
with payment for land made for c4,200 acres, including possession of c2,500 acres, should
help it start production in FY13.
The company maintains its generation target of 235bn units for FY12, implying 15%
growth yoy and c92% PLF (coal) in 2H, compared to a decline of 2% yoy and 82.6% PLF
in 1H. We view this as challenging, but still maintain our 234.8bn-unit estimate for FY12.
No changes to our estimates, maintain INR194 target price, and reiterate Neutral rating:
We use DCF to value NTPC, and we apply a WACC of 10.3% to derive our 12-month target
price. Key upside risks are faster-than-expected execution of projects under construction and
upside from profits from captive coal mines. Downside risks include non-availability of fuel,
impacting operations and efficiency gains.
2QFY12 results highlights
Reported profit boosted by one-offs: NTPC reported net profit of INR24.2bn, up 15% yoy, and above
our estimate of INR18.9bn, boosted by accounting one-offs in Q2 related to previous years, such as prior
period adjustments (INR1.6bn), provision for interest charges written back (INR1.9bn), interest
receivable from customers on favourable tariff revision orders (INR1.1bn), and fixed charges largely
related to grossing up of ROE at the corporate tax rate instead of MAT (INR2.4bn), while deferred tax in
Q2 was higher by INR0.7bn related to the previous year. Thus, adjusted net profit of INR18.0bn was up
2% yoy, or 4.5% below our estimate.
Fuel cost increase: Increase in net sales was largely due to increase in fuel cost, which is a pass-through
to customers. The weighted average cost of coal increased to INR2650/ton in Q2 from INR2100/MT.
PLF fell c443bps in Q2: NTPC reported a decline in generation of 3% yoy to 50.9bn units, or 3% below our
estimate, as PLF decreased 443bps to 78.4%. The company explained this was due to low demand for thermal
generation, as low-cost hydro and nuclear generation was available in Q2.
PAF was down 306bps at 83.4%, in line with our expectation: The company attributed this largely to
planned outages in line with low demand and less to coal shortage at its plants. The loss in generation due to
coal shortage in Q2 was c1.94bn units (c3.8% of total generation in Q2).
Collection days increased to 50-65 in Q2 (previously 20-35 days): The company indicated that in the
past, c60-70% of the collection was received on the first day of billing availing a cash discount, but due to
a credit squeeze by banks, this has declined to 30-40%. Similarly, payments received on last day of the
due date increased to 20-25% from 5-10% earlier.
Progress at the company’s captive Pakribarwadih mine: Payment for land made for c4,200 acres,
including possession of c2,500 acres, should help it start production in FY13.
Valuation
We use a DCF methodology to value NTPC and apply a WACC of 10.3% – assuming a cost of debt of
8.7%, cost of equity of 10.9%, beta of 0.9, and terminal growth of 4% – to derive our 12-month target
price of INR194.
Under our research model, for stocks without a volatility indicator, the Neutral band is 5ppts above and
below the hurdle rate for Indian stocks of 11%, or 6-16% around the current share price. Our target price
implies a potential return of 11.3%, which is within the Neutral band; hence, we reiterate our Neutral
rating on the stock. Potential return equals the percentage difference between the current share price and
the target price, including the forecast dividend yield when indicated.
Our target price of INR194 implies a FY13e PB of 2.0x versus the current FY12e PB of 1.9x, and an FY13e
PE of 15.7x versus the current FY12e PE of 15.6x.
Risks
Key upside risks, in our view, are faster-than-expected execution of projects under construction and
upside from profits from captive coal mines. Downside risks that we see include non-availability of fuel
impacting its operations and efficiency gains.
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