The NTPC management claims the company will add the targeted 22,000 MW capacity in the 11th Plan period (2008-2012). However, industry watchers believe that a only little over 15,000 MW will be added; some say it could be far lower at just 13,000 MW. In the first two years of the Plan period, the public sector power generation firm managed just 3,750 MW. This year, it hopes to add 3,300 MW.
Brokerage Motilal Oswal points out that for about 75 per cent of the 17,400 MW capacity that is being set up currently, the spends are less than 50 per cent of what were planned. There are also a few concerns related to existing plants, mainly availability of coal, though the management brushes these aside saying the company will continue to import coal when domestic supplies fall short of its needs. NTPC’s captive coal mining project has been delayed somewhat, though that again is a minor issue. What’s really of concern is that unless the company executes projects efficiently, it will end up blocking cash, which will earn it zero returns.
The slow pace of capacity addition, falling interest income, say analysts, will result in NTPC’s earnings growing at a compounded 5.6 per cent between 2008-2010 and at a slightly accelerated 9.5 per cent between 2010-2012. That is despite the fact that new tariff regulations will help NTPC — the return on equity has been upped to 15.5 per cent from 14 per cent.
At Rs 220, the stock trades at nearly 21 times estimated 2009-10 earnings and about 17.5 times 2010-11 earnings and is way too expensive to justify the expected earnings growth. Also, what will make the NTPC stock less attractive is that it will enjoy a much lower weight — down about 500 basis points — once the Nifty becomes a free-float index later this month.