Buy NTPC at Rs 144 and add on dips to Rs 128 - Rs 134 for target of Rs 156 in 1 quarter and Rs 173 in 2-3 quarters ::HDFC Sec, report

Please Share::

�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��

��

-->
Result Highlights Revenues flat y-o-y but up 13% q-o-q In Q3FY15, Net Sales was Rs 18739 cr, flat y-o-y but up by 13% q-o-q. Sales during the quarter include Rs. 120.82 cr (corresponding previous quarter Rs. 639.55 cr) pertaining to previous years recognized based on the orders issued by the CERC/Appellate Tribunal for Electricity (APTEL). Sales also include (-) Rs. 10.19 cr (corresponding previous quarter Rs 198.55 cr) on account of Income tax refundable to / recoverable from the beneficiaries as per Regulations, 2004. It also includes Rs. 29.52 cr (corresponding previous quarter Rs. 18.92 cr) on account of deferred tax materialized which is recoverable from beneficiaries as per Regulations, 2014. Gross generation has gone up 3.7% y-o-y and by 10.6% y-o-y to 61.3 bn units driven primarily by capacity addition. Energy sent out also has gone up 3.5% y-o-y and up 11.2% q-o-q to 57.2 bn units. Average realizations have fallen by 3.6% y-o-y but risen 1.6% q-o-q to Rs 3.3/kwh. Particulars (bn units) Q3FY15 Q3FY14 % chg Q2FY15 % chg Gross generation 61.3 59.1 3.7% 55.4 10.6% ESO 57.2 55.3 3.5% 51.5 11.2% Price per unit based on ESO 3.3 3.4 -3.6% 3.2 1.6% Operating margins (excluding other income) in Q3FY15 have been flat at 24.7% on y-o-y, but rose from 19.4% on q-o-q basis in spite of the impact of change in tariff norms as per the new CERC guideline. Fuel costs have gone up marginally by 2.4% y-o-y and by 5.9% q-o-q to Rs 12119.6 cr. As a percentage cost to sales fuel costs have gone up to 64.3% in Q3FY15 from 62.8% in Q3FY14. Other income has come down 36% y-o-y to Rs 481.3 cr. EBITDA margins are down from 27.6% in Q3FY14 to 26.6% in Q3FY15 but was up from 21.9% in Q2FY15. Overall tax rate stood at 3.5% compared to 24.3% in Q3FY14 as it included tax relating to earlier years amounting to Rs (663.60) cr as the same will be recovered from the beneficiaries in future years according to the 2014 CERC regulations which provides recovery of income tax from the beneficiaries by grossing up of the return on equity based on the effective tax rate for the financial year. Depreciation costs have gone up 22.4% y-o-y and 8.8% q-o-q to Rs 1253.41 cr. PAT was up by 7.4% y-o-y and 48.4% q-o-q to Rs 3074 cr due to the tax write back of Rs ~660 crore in Q3FY15 PLFs & PAFs… Plant availability factor (PAF) for coal based stations dropped to 91% in Q3FY15 vs. 95.1% y-o-y. PAF for gas-based stations dropped to 93.2% in Q3FY15 vs.99.9% y-o-y but up from 89.1% q-o-q. Also, the plant load factor (PLF) for coal-based stations for Q3FY15 declined to 80.8% vs. 82.4% y-o-y. PLF also dropped across gas-based plants to 31.8% vs. 33.5% y-o-y and 33.4% q-o-q highlighting the persistent problems of gas-based capacities in the country.

Capacity additions NTPC’s installed capacity for the group was 43,143 MW compared to 42,543 MW y-o-y with 600 MW capacity added. Commercial capacity of the standalone entity stands at 37142 MW while the Group’s commercial capacity stands at 42643 MW. During Q3FY15, management indicated that Barh II 660MW (w.e.f. 15th November 2014) and solar PV power station of 15 MW at Singrauli (w.e.f 31st December 2014) have been declared commercial. Also Koldam 400MW and one unit of Kanti Bijlee (195MW) is on track, but would be commissioned by end FY15. This totals to capacity addition of 1.5GW for FY15, vs initial target of 1.8GW. 250MW Nabinagar project is possibly facing delays and may slip to next year. Ordering for Katwa (1,320MW) and Khargon (1,320MW) plants is being held up as company is waiting for environmental clearances. Capex planned for FY15 was Rs 245bn and capex incurred during 9MFY15 is Rs 163.7bn, on a consolidated basis. Other highlights… • NTPC‘s board has approved issue of 1 bonus debenture share (of FV Rs 12.5/share with coupon of ~8.5%) for every equity share held. Management stated that final approval from Ministry of Corporate Affairs (MCA) is expected by end February 2015 and debentures would be issued and listed by 15th March 2015. The debentures will be treated as debt and interest on them will be allowed as pass through in the tariff. There will be no impact on core RoE but reported RoE can go up by ~90bps due to the issue of these debentures. • The company has received the bid for appointment of Mine Development cum Operator (MDO) for Pakri Barwadih mine. • The Central Electricity Regulatory Commission (CERC) notified the Tariff Regulations, 2014 in February 2014 (Regulations, 2014) Pending issue of provisional/final tariff orders w.e.f. April 01, 2014 for all the stations, beneficiaries are billed in accordance with the tariff approved and applicable as on March 31, 2014 as provided in the Regulations, 2014. The amount billed on this basis is Rs. 18895.72 cr (corresponding previous quarter Rs. 17872.33 cr). • The Company has filed a petition before the Hon'ble High Court of Delhi contesting certain provisions of the Regulations 2014. Pending issue of provisional/final tariff orders under Regulations, 2014 by CERC and disposal of the petition, sales have been provisionally recognised at Rs. 18569.97 cr for the quarter ended December 31, 2014 (corresponding previous quarter Rs. 17891.73 cr) on the basis of said Regulations. • The company received approximately 39.6 mt of domestic coal which indicates improvement in supply of coal as it was 38mt in Q3FY14 and 33.9 in Q2FY15. 4.9mt of coal was imported in Q3FY15. In a positive step towards captive coal mining, Supreme Court has exempted the Pakhri Barwadih mine from de-allocation. Government of India has promulgated Coal Mines (Special Provisions) Ordinance, 2014 on 21st October 2014 wherein five blocks allotted to the company have been cancelled. The Ministry of Coal, via order dated 18th December 2014 has earmarked 36 coal blocks for Allotment and these five coal blocks are appearing in the list. The company expects the allotment of the cancelled coal blocks in its favour. Accordingly, the Company considers the expenditure incurred on these coal blocks as good. • The Company has revised the accounting policy for depreciation of certain assets in alignment with Schedule-ll to the Companies Act, 2013 which has become applicable from 1st April 2014. Consequently, profit for the quarter is lower by Rs. 3.2 cr and fixed assets are lower by Rs. 16.92 cr. Further, an amount of Rs. 5.5 cr has been recognized in the opening balance of the retained earnings where the remaining useful life of such assets is Nil as at 1st April 2014 in line with the provisions of Schedule-II to the Companies Act, 2013. • During the quarter, in line with the accounting policy on advance against depreciation, excess of depreciation charged in the books over the depreciation recovered in tariff, amounting to Rs 208.32 crore upto 31st March 2014 has been recognised as prior period sales and netted from 'Other Expenses'. • Provision for current tax for the quarter and nine months includes tax related to earlier years amounting to Rs (663.60) crore and Rs (1952.53) crore respectively (corresponding previous quarter and nine months Rs 198.79 cr).

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 42.6 GW of generation capacity (commercial) at group level and 37.1GW 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 Q3FY15, NTPC reported Net Sales of Rs 18739 cr flat on y-o-y but up 13% q-o-q while Reported PAT was up 7.4% y-o-y to Rs 3074 cr. Operating margins were flat on y-o-y basis at 24.7% in Q3FY15 and was up on QoQ basis (19.4% in Q2FY15). PLFs & PAFs for coal and gas based stations were lower y-o-y while PAF for both coal and gas on q-o-q basis rise by 18.6% and 4.6% respectively, while PLF of coal based improved by 10.4% it declined by 4.8% 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, 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 80.8%, down 160bps YoY due to a combination of yearly maintenance and poor coal availability. Q3FY15 performance was surprisingly good at the operating level with core RoE at ~20%. Sustained performance would improve confidence on core earnings and lead to re-rating. NTPC has cash and cash equivalent of ~Rs.22000 cr and has been exploring inorganic growth opportunity. Net gearing for NTPC is low at ~0.7:1. We have revised our top line estimates for FY15 and FY16 due to the rollover of additional capacities in FY16 and FY17, but our maintaining FY15 and FY16 bottom line estimations citing low tax rate. Near term outlook of the stock remains tentative. As other power companies become expensive, NTPC 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. Nevertheless, NTPC remains a key beneficiary once these issues are sorted out so we remain positive for the long term. Under the new regulation, NTPC’s return on invested equity will likely come down from 22-23% previously. 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 Q2FY15 dated Nov 05, 2014 we had stated that investors could buy the stock at the then CMP of Rs 148 and add on dips in the band of Rs 132-Rs 136 (1.20x FY16E PBV & 11.3-11.6x FY16E EPS) for a target price of Rs 161 (1.4xFY16 BV & ~14xFY16E EPS) in the next one quarter. Post the issue of the report, the stock touched a low of Rs 126.8 on 17th December 2014 and a high of Rs 148.4 on Nov 18, 2014. We think the worst is over for the stock. Investors could look at buying the stock at CMP and add on dips to Rs 128- Rs 134 (1.15-1.2x FY16 BV & ~11-11.5x FY16E EPS) for a target of Rs.156 (1.4xFY16 BV & ~13.3xFY16E EPS). Medium term investors can however hold on for higher target of Rs.173 (1.55x FY16E BV & 14.8xFY16E EPS) over 2-3 quarters.

LINK
http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3011172