After its initial public offering in 2004, followed by a follow-on offering in 2009, the finance ministry is proposing to disinvest another 9.5 per cent stake in India's largest power producer —NTPC — according to media reports. The management though, has denied any such development.
If the disinvestment happens, it will fetch the cash-strapped government roughly Rs 13,000 crore or close to 45 per cent of the total disinvestment target of Rs 30,000 crore in FY13. Given the woes of the power sector and NTPC's relatively better position among its peers - from the fuel availability perspective, it won’t be tough to raise the funds.
It depends for only up to 10 per cent of its total FY13 requirement of 164 million tonnes (mt) on more expensive imported coal, if it operates at 90 per cent plant load factor. Of the 16 mt to be imported, nine mt has already been tied up and the rest is expected to be arranged shortly.
The only direct implication of the divestment will be an increase in free-float (liquidity) and consequently higher weightage in certain indices wherein NTPC is a constituent (like BSE Power, its current weight is 21.22 per cent restricted by a low free-float factor of 0.2). Fundamentally though, things are looking up for the company.
Additionally, the company's first captive mine (total three billion tonnes of reserves in six mines) is expected to be ready for commissioning by 2012-end. Recently, Chairman Arup Roy Choudhury told Business Standard the coal ministry has assured them of returning the three de-allocated blocks, though a formal communication is yet to come. If this happens, it will improve fuel availability and growth prospects for the company.
For now, with 99 per cent of its power sold to state electricity boards (SEBs), there is little risk of demand dropping, though some payment delays are not ruled out given the financial condition of the SEBs. Moreover, due to long-term fuel supply agreements and low proportion of coal imports, its production cost is cheaper than others.
Though the company has fallen short of its capacity addition targets in the past, it is trying to improve on that, too. Of the total target of adding 4,160 Mw in FY13, it has already added half of it so far.
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But this has to happen consistently and investors should keep monitoring it. Notably, there is low equity dilution risk as funds have already been tied up for projects under construction (14,038 Mw in the 12th Plan). Additional debt will also not put much burden given that its net debt to equity is just 0.5 times and the company has strong cash flows from operations of over Rs 10,000 crore annually.
Venkatesh Balasubramaniam, analyst, Citi Research, made an interesting comment on the company in a report in August. He said, “Investors have questioned NTPC's ability to compete with private independent power producers, given that it did not win any competitive ultra mega power project bids. It is now fairly established that NTPC saw the impending inflationary risks of fuel price and capital costs and chose to make reasonable bids. While NTPC continues to work on adding 14,000 Mw capacity in the 12th Plan (based on assured return on equity model), most private independent power producers are making a beeline with Central Electricity Regulatory Commission pleading for rise in rates in PPAs, which do not allow such increases post the bid.”
All these positives have already been reflected on the stock’s outperformance Vs the Sensex and BSE Power Index in the last three months. Despite that, valuation at 1.6 times price to book value and 13.5 times price to earnings multiple (estimated for FY14) are reasonable given average 2.2 times and 17 times one-year forward historical multiple. While the proposed offer should see good response at current levels, any discount would only make it attractive.