NTPC’s stock fell 2.5 per cent to Rs 153.65 on Wednesday, after news about the company halving its new capacity addition target for the 12th five-year Plan to 14,500 Mw. Though a solution to its fuel supply agreement (for future capacities) with Coal India is awaited, most analysts are not perturbed by Wednesday’s fall, saying the adverse news is not new and factored in. Many of them have the stock as their preferred pick in the sector, on account of better visibility and reasonable valuations.
In comparison, many private power companies are having sleepless nights over the looming problem of shortage of coal, which is affecting their gigantic investments in expansion of capacities. But NTPC seems better placed, also visible from the improved fuel situation in the recently concluded quarter (March 2012 or Q4). Further, the management is optimistic on the trend continuing. Also, one of the captive coal mines will start production in calendar year 2013.
This has removed a big overhang from the stock, which has outperformed the Sensex in the current month. V Srinivasan, analyst, Angel Broking, says, “The stock has corrected significantly due to concerns over sufficient coal availability for plants in the future. We believe these concerns are overdone, as we expect the company to bridge the shortage in domestic supply through imports and captive coal. We continue to maintain our ‘Buy’ rating on the stock.”
| IMPROVING OUTLOOK | |||
| FY12 | FY13E | FY14E | |
| Revenues (Rs cr) | 62,054.0 | 72,335.5 | 80,967.0 |
| % change y-o-y | 9.1 | 16.6 | 11.9 |
| Operating profit (Rs cr) | 14,052.0 | 17,427.0 | 22,056.0 |
| % change y-o-y | 3.2 | 24.0 | 26.6 |
| Net profit (Rs cr) | 9,223.7 | 9,883.5 | 11,943.0 |
| % change y-o-y | 1.3 | 7.2 | 20.8 |
| EPS (Rs ) | 11.2 | 12.0 | 14.5 |
| P/E (x) | 14.0 | 13.1 | 10.8 |
| E: Estimates Source: Company, analyst reports | |||
At current levels, the stock is valued at 1.5 times the 2012-13 price to estimated book value, which is at the lower end of 1.5-3 times historical multiples, though in line with its far smaller peers.
Improved fuel visibility
The company witnessed better fuel availability in the March quarter, as it received 38.6 million tonnes of coal compared to 35.2 mt in the year-ago period. Materialisation (receipt) of coal against actual contracted quantity (ACQ) was 103 per cent, compared to 92.4 per cent in the same quarter last year. Hence, NTPC imported less coal (2.2 mt vs. 2.6 mt) and imported coal blending stood at 5.3 per cent versus 6.4 per cent earlier. This led to higher generation (up 4.1 per cent year-on-year in the March quarter to 60 billion units) and better plant load factor (PLF) of 91.1 per cent (versus 88 per cent). Coal-based plants form about 85 per cent of its total operational capacity of 37,514 Mw; hence, availability of the fuel is crucial for the company.
NTPC expects better fuel availability to continue in FY13. In the India Investor Conference organised by Citigroup Global markets last month-end, the management mentioned the fuel supply situation had improved in FY13 so far. Coal materialisation continues to be in excess of 100 per cent.
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NTPC needs a total of 164 mt of coal to achieve a PLF of 90 per cent. Of this, 125 mt will come under existing fuel supply agreements, 15-20 mt will come under memorandums of understanding and 25 mt will be imported. Says Mohit Kumar, analyst, Antique Stock Broking, “We believe the company is best placed to tide over the fuel shortage, compared to any other player in the utility space.”
Notably, the Pakri-Barwadih coal block (with reserves of 1.4 billion tonnes) is expected to start production in CY2013 and the process of return of the other three coal blocks (de-allocated earlier) to NTPC is also almost complete. A formal announcement is expected any time. However, gas supply continues to be a concern. In FY12, total availability was 13.09 million standard cubic metres a day (mscmd) versus 13.77 mscmd in FY11. Hence, its gas-based plants were operating at sub-optimal capacity, wherein PLF for FY12 stood at 65 per cent versus 71.7 per cent in FY11.
Slow expansion a concern
Meanwhile, NTPC added just 2,820 Mw (1,160 Mw declared commercial) and 7,888 Mw in FY12 and in the 11th Plan (2007-12) against targets of 4,320 Mw and 22,000 Mw, respectively. For the 12th Plan, (FY13-17), NTPC has scaled down its target by half from 29,000 Mw to 14,500 Mw, which includes 4,160 Mw and 4,298 Mw in FY13 (includes FY12 spillover capacity of 2,160 Mw) and FY14, respectively. Murtuza Arsiwalla, analyst, Kotak Institutional Equities, while maintaining ‘Reduce’ on the stock, in a report last month, noted, “We continue to remain concerned on absence of earnings growth driven by capacity addition.” Such concerns over slow capacity addition are expected to continue till a solution with Coal India over fuel supply agreement for new capacities emerges.
Outlook
The company’s return on equity (RoE) slipped in FY12 to around 13 per cent, as reported net profit was marginally up compared to FY11 (RoE of close to 14 per cent). Analysts expect the RoE to improve, aided by lower taxes. Says Sanjeev Zarbade, analyst, Kotak Securities, “The company expects ROE to be grossed up at the corporate rate (33 per cent); thus, there could be some tax savings.” Further, the capacity additions will add to the regulated equity base in the next two years, which will help improve RoE. Regulated equity is the quantum of own-funds deployed in operational assets earning fixed-returns, based on regulations. Put together, these should help drive NTPC’s earnings in the coming years.
Mohit Kumar from Antique, who has a buy on the stock with a target price of Rs 203, says the worst is factored in, and expects NTPC’s earnings growth to see a healthy growth of over the next three years.