Well planned expansions and foray into related segments will help NTPC sustain decent growth rates for many years.
In an environment where economic growth is slowing down and many companies are cutting production, NTPC proves to be a safe haven and offers decent growth with assured profitability and triggers that could boost overall returns in the long run.
Importantly, India’s largest power generation company, has the funding capabilities to achieve its growth plans, which include increasing its current installed capacity of 29,894 megawatt (mw) (including 2,044 mw through joint ventures) to 50,000 mw by FY12 and to 75,000 mw by FY17—translating into a CAGR of 10.6 per cent over the next nine years. The company’s moves to secure coal mines (in India and abroad), diversify into equipment manufacturing and explore overseas markets to set up power plants are also seen in positive light.
| STEADY GROWTH | |||
| Rs crore | FY08* | FY09E | FY10E |
| Net sales | 37,050 | 39,837 | 44,186 |
| Net profit | 7,745 | 8,169 | 8,904 |
| EPS (Rs) | 9.39 | 9.93 | 10.82 |
| PE (x) | 16.08 | 15.21 | 3.96 |
| P/BV (x) | 2.36 | 2.16 | 1.90 |
| * adjusted E: Average of analysts estimates | |||
Profitable growth
The high energy deficit estimated at 14.4 per cent during peak time and better regulatory framework provide abundant growth opportunities in the power generation business, which NTPC has been able to capture. Having advanced its schedule as per five-year plan targets, NTPC is largely on track to meet the target for the 11th five year plan (2007-12). It has already commissioned 2,500 mw of the 22,430 mw of power generation capacity planned (see Capacity Expansion Plan).
| CAPACITY EXPANSION PLAN | ||||||
| In mw Fiscal | Owned by NTPC |
via JVs |
Total | |||
| Coal | Hydro | Gas | Total | |||
| FY08 | 1,000 | - | - | 1,000 | 740 | 1740* |
| FY09 | 2,320# | - | - | 2,320 | 500** | 2,820 |
| FY10 | 2,800 | 800 | - | 3,600 | - | 3,600 |
| FY11 | 2,820 | - | 1,300 | 4,120 | 2,500 | 6,620 |
| FY12 | 4,230 | 1,120 | 1,300 | 6,650 | 1,000 | 7,650 |
| Total | 13,170 | 1,920 | 2,600 | 17,690 | 4,740 | 22,430 |
| * commissioned** 250 mw commissioned # 500 mw commissioned | ||||||
Construction activity for 16,500 mw of capacity is already underway, and equipment orders for the same have been placed. A large part of the fuel linkage, too, is in place in the form of long-term agreements with Coal India and its subsidiaries. Analysts say, any shortfall could also be easily met through imports, which are pegged at 8 million tonnes (mt) in FY09 as compared with estimated coal intake of 130 mt.
While regulations provide a minimum return on equity (RoE) of 14 per cent, provided certain conditions are met, NTPC has always been ahead of earnings returns of 14-16 per cent in the last five years; thanks to its ability to run plants at high utilisation levels and earn incentives. Analysts indicate that there is headroom to earn higher returns, which though could happen about 1-2 years down the line.
Says an analyst, “As per the new mega power policy, companies can have 85 per cent of their capacity tied up through the power purchase agreement and earn 14 per cent fixed returns, the balance 15 per cent of power can be sold in the open market at higher rates that yield 18-20 per cent.” For NTPC, which is among the lowest cost producers of power (average selling price of Rs 1.84 per unit) it stands to gain from such policy measures. The company has earmarked about 2,000-3,000 mw of the new capacity for sale in open market, says the analyst.
Diversifying revenue mix
To diversify revenue mix and mitigate fuel risk, NTPC is setting up hydro power projects; estimated total capacity of 1,920 mw (already under implementation) by 2012 and 9,000 mw by 2017. Likewise, gas-based power generation capacity, now at 5,435 mw is estimated to increase to 10,000 mw. These along with nuclear power capacity of 2,000 mw by 2012 (in joint venture) and efforts in the renewable energy space, will see the share of coal-fired power capacity decline from 82 per cent currently to 70 per cent by 2017. Moves to set up power plants through joint ventures in Sri Lanka (500 mw; expected commissioning by 2012) and Nigeria (1,200 mw) will help NTPC establish a presence beyond Indian borders.
Integration moves
In a move that will enhance its fuel security, the company has secured seven coal blocks (including two in JVs with Coal India), with estimated reserves of 3,000 million tonnes. These blocks are expected to produce 48 mt per annum (mtpa) of coal by 2017 (14 mtpa by 2012), which will help meet about 20 per cent of the company’s total coal requirements. Any success in securing coal assets abroad (through its JV with SAIL, NMDC, etc) will only improve fuel availability.
In the equipment business, NTPC has bought a 44.6 per cent stake in Kerala-based TELK, a manufacturer of high-voltage transformers and allied equipment. NTPC has also formed a 50-50 joint venture with BHEL, which will produce power equipment and undertake EPC activities. Further, NTPC has inked a JV(with 49 per cent stake) with Bharat Forge, which will manufacture castings, forgings and balance of plant equipment for the power sector. With returns significantly higher in the equipment manufacturing business, these investments should lead to higher returns for NTPC and alleviate the shortage of equipment for its own needs. However, given their small contribution (in initial years) and the fact that these projects are in the early stages of implementation, the boost to overall return on equity is expected to accrue only from FY11 onwards.
All these along with forward integration into power trading and distribution will help NTPC achieve its vision of emerging as a world class integrated power major.
Funding
Put together, NTPC will invest about Rs 106,000 crore (up to 2012), of which, the power generation business will need over Rs 90,000 crore. Given that the power projects are being financed with a debt-equity mix of 70-30, NTPC’s share of equity works out to about Rs 29,000 crore. While the company (standalone) had cash and bank balances of Rs 14,933 crore and investments (in bonds) of about Rs 15,000 crore as on FY08, it’s net cash flow from operations was Rs 10,171 crore. Recently, it tied up with PFC for funds worth Rs 10,000 crore. All these put together indicate that funding will not be an issue for NTPC. Its move to raise the borrowing limits to Rs 100,000 crore (approved in the AGM recently) also indicates the company’s intent of keeping pace with project execution deadlines.
Investment rationale
In turbulent times, high cash generating companies like NTPC are considered as defensive plays. The stock’s outperformance vis-à-vis the BSE Sensex across different time frames (in the last one year) is proof of the pudding. What NTPC also brings along is a strong balance-sheet, fixed returns, enviable track record and assured growth, with minimal risks that pertain to a possibility of delay in a few of its projects and some shortfall in fuel supplies in the near-term. On the other hand, a favourable judgment in its dispute with Reliance Industries over supply of gas will help boost output of its gas-fired projects, which are currently running at utilisation rates of 60-70 per cent, from FY10 onwards.
Although valuations are not cheap, given that the price-to-book value ratio stands at 1.9 times (based on FY10 estimated book value), the stock can be considered on declines with 14-15 annual returns per cent in the next 3-4 years.
