NTPC: ‘Safest play in utilities but….’

CMP Rs168, Target Rs171, Upside 2.1%

NTPC is the safest bet in the power utility space given the company’s dominant position in electricity generation, better fuel supply arrangements (FSAs), robust power purchase agreements (PPAs) and higher dividend yield. Payments from NTPC’s customers, predominantly SEBs, are supported by the RBI gives it an extra edge. However, execution issues, lower plant availability factor (PAF) due to domestic coal deficit and falling plant load factor (PLF) led by SEBs backing down will remain key concerns. We believe the company to sustain growth led by its regulated business model, reasonable growth in capacity addition. We expect 9% CAGR in revenues and muted CAGR in earnings over FY11-FY14E. We estimate effective ROE to trend down by ~200 bps in the next two years, led by coal shortages and SEB issues. We assign MP rating on NTPC with a 9-month target price of Rs171.

Plans to add ~3GW next year

In a regulated model like NTPC growth is mainly driven by capacity additions. The company would invest ~Rs200bn in FY13 towards setting up ~3GW of additional capacity (media reports). But, gazing at slippages in the past, we remain cautious and expect NTPC achieving only ~2.4GW of its planned additions.

Adequate fuel security; fuel cost is pass through

NTPC’s coal requirement will increase to ~200ton by FY17 from ~164mn tons in FY12E. NTPC has already entered into long term coal agreements to secure its fuel requirements for capacity of ~100GW. Further, it has also been awarded eight coal mines and mining activities at two sites are expected to commence by FY14. For NTPC, fuel cost being pass through, the company is able to blend imported coal without hurting profitability. We expect increased trend in imported coal blending to continue (currently blending ~30%).

Regulated model to enable sustain growth

NTPC operates in a regulated environment, which makes its earnings steady and secure. Capacity addition holds the key for future earnings growth. Even after considering some slippages, we believe NTPC offers good value in the long term as it looks to enhance its capacity to 75GW by 2017. But current risk reward is unfavorable. Therefore, we value the stock at Rs171, which implies FY13E book value at 1.8x.