(BSE: 532555 | NSE: NTPC | ISIN: INE733E01010)
Company Background NTPC is the largest thermal power generating company in India . A public sector company, it was incorporated in 1975 to accelerate power development in the country. At present, the government holds 89.5% of the total equity and balance 10.5% by domestic banks, FIIs and public. Over the last three decades, NTPC has emerged as a national power company, with power generating facilities in all the major regions of the country. NTPC’s share of the total installed capacity in the country as on March 31, 2006 was 19.51%. It contributed 27.68% of the total power generation of the country during 2005-06. During FY06, the company acquired a 28.33% stake in Ratnagiri Gas and Power Private Ltd (RGPPL) for Rs 500 crore. RGPPL is a joint venture between NTPC, GAIL, domestic FIs and the Maharashtra SEB Holding Co. Ltd. to take over the 2,150 MW gas-based Dabhol Power Project.
Investment Rationale Power sector on cusp of huge growth Although India ‘s power generation capacity has increased substantially in recent years, it has not kept pace with the growth in demand or the growth of the economy generally. India ‘s electricity consumption is amongst the lowest in the world at 569 units per capita in 2006. This contrasts with 1,484 units per capita in China , 2183 units in Brazil and 13,456 units in the US . To boost generation, the government has unveiled a plan to set up five ultra mega power projects of 4,000 MW each. Further, in a bid to improve fuel supply to power producers, it has allocated 26 coal blocks with reserves of 8,581 million tonnes and four lignite blocks with reserves of 755 million tonnes.
Expansion plans to drive future growth At present, NTPC has an installed power generation capacity of 26,194 MW. During the 11th Five-Year plan (2007-11), it plans to enhance the capacity by an additional 21,941 MW. We believe the massive capacity addition will help the company retain its position as the largest generating utility in the country. It already has the advantages of a high plant load factor (PLF), secured coal supplies and low receivables.
Backward integration to secure fuel supplies NTPC has a policy of entering into long-term tie-ups for its fuel requirements. It has now evolved a strategy for backward integration into coal mining and oil & gas exploration. We believe these steps will give it secured fuel supplies and also mitigate risks to its capacity expansion plans.
Proximity to fuel sources Most of NTPC’s coal-fired stations are located close to the mines that supply coal. We believe the proximity of its plants to fuel sources will help it generate electricity at competitive rates.
Diversification moving up the value chain The company plans to diversify its business by taking advantage of opportunities created by regulatory and economic reforms. It has ventured into power trading and is considering downstream integration into distribution business. It also plans to enhance its current consulting services capabilities in the domestic and international markets. We believe that these initiatives will enable the company achieve greater vertical integration and create new avenues for revenue and margin growth.
Risks & Concerns The Central Electricity Regulatory Commission (CERC) has issued new tariff regulations for the period from April 1, 2004 to March 31, 2009 , under which the post-tax rate of return on equity has been reduced to 14% from the 16%, which was allowed until March 31, 2004 . NTPC’s operations and expansion plans have significant fuel requirements. In case, it’s unable to secure fuel at competitive prices, its operational and financial performance could be impacted.
Financials We expect revenue from sale of electricity to increase to from Rs 26142.9 crore in FY06 to Rs 32,579.08 crore in FY08 as a result of the increase in commercial capacity by 7,290 MW, higher PLF of existing capacities and higher variable charges. We expect net profit to grow at a CAGR of 20.61% from Rs 5,825.30 crore in FY06 to Rs 10,226.80 crore in FY08 on account of a fall in depreciation, higher incentives due to high PLF and unscheduled inter-unit charge. We expect EPS to be at Rs 12.40 in FY08.
Valuations We believe NTPC’s aggressive capacity expansion, coupled with its high PLF and unscheduled interchange charge would drive earnings growth at a CAGR of 20.61% over FY06-08E and improve its RoE to 14.30% from the regulated 14%. Using a DCF valuation, we arrive at an intrinsic value of Rs 201 per share.
Technical Outlook The stock has been an outperformer in an otherwise weak market. It has been moving in a ascending triangle pattern and awaiting a breakout above the Rs 170 levels. The MACD indicator has been moving up smoothly and is finding support on the channel. The RSI is also finding good support. What is more encouraging is huge volume price up-moves in the stock in the last few sessions
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