8/12/2019 NTPC Ltd- Update Report http://slidepdf.com/reader/full/ntpc-ltd-update-report 1/18 18 th June 2014 icrosec Resear Investment Highlights Key Financials Highlights (Figure in INR CR) STRONG BUY NTPC Ltd Sector – Power Code 532555 Code NTPC mberg Ticker NTPC IN rs Ticker NTPC.BO Value (INR) 10.0 y Share Capital (In INR Cr) 8,245.5 ge P/E 14.5x vs Sensex 0.8 ge Dail y Volume (000's) 581.4 end Yield 4.1% Equity Ratio 0.8 STOCK SCAN We rate NTPC Ltd (NTPC) a “STRONG BUY”. NTPC, a government-owned enterpris (Government of India’s stake at 75%), is India’s largest power generator, with operational thermal capacity of 41.7GW. It contributes to 30% of all power generation in India. NT one of the safest bets in the power utility space given the company’s dominant position in electricity generation, better fuel supply arrangements (FSAs) and robust power purchase agreements (PPAs). Earlier we have recommended the stock with a “ST BUY” rating in our ICR note on 18th of April, 2013 and since then we have maintain our positive bias on the stock. The current market price is not taking cognizance of the growth in capacity and regulated nature of the business. Unlike the past, we believe execution issues will no longer hinder the stock performance. We see upside momentum of NTPC’s earning for FY15E. Therefore we recommend a “STRONG BUY” with a target price of I 182. Capacity addition pace to dramatically improve over FY12-17E- Unlike under the 10th a 11th five year plans (FYP), when NTPC missed its capacity-addition targets by 2.2GW and 12.8GW, respectively, for the 12th FYP, its capacity addition target of 14GW appears achievable, as capacity additions are front-end loaded. Over FY13-17, we expect it to add 14GW of capacity - an average of 3.3GW/year v/s historic average of 1.5-2GW/year. This provides strong revenue visibility for NTPC over the next three years, making it bet placed than other developers. Better fuel sourcing ahead- NTPC has assured coal linkages for 90% of installed capacity and it is partly better placed to address incremental fuel requirement given captive mines. NTPC has seven captive coal mines with reserves of 3BT as compared to expected annual consumption of 218MT in FY17,NTPC plans to meet 20% of its coal demand from captive mines by FY17.It is in a comfortable position when it comes to coal imports given its PPA structure, which allows fuel cost pass-through. We remain upbeat on fuel supply security. Scalable and de-risked business model- The Company is a regulated utility with CER determined tariffs allowing it to recover a return of 15.5% on a pre-tax basis, for projects commissioned on or after 1 April 2014, NTPC would be eligible for an additional 0.5% return on equity if the project is completed within the stipulated timeframe.NTPC has signed PPAs with states for 37GW of fresh capacity. Hence, NTPC will remain a pure-play regulated model during 12th and possibly 13th plan. SEBs’ Default- No Risk for NTPC- NTPC has a strong payment escrow security mechanism. In case of non-payment of receivables from the SEBs after 90 days grace period, NTPC can directly recover the dues from Central Government grants to the respective states. NTPC realized 100% a ment of bills from the customers for 9th successive ear. Source: Company, Microsec Research nalyst: Anik Das mail id: [email protected]nt Market Price (INR) 151.3 Objective(INR) 182.3 de Potential (%) 21% eek High (INR) 168.8 eek Low (INR) 110.9 et Capitalization (In INR Cr) 124,712.6 Market Data Particulars FY 11 FY 12 FY 13 FY 14 FY 15 E FY 16 E Net Sales 58359.7 61969.2 65673.9 71602.6 74725.2 81356.4 Growth (%) 6.2% 6.0% 9.0% 4.4% 8.9% EBITDA 15796.3 13897.2 17114.1 17764.5 18467.4 19851.2 EBITDA Margin (%) 27.1% 22.4% 26.1% 24.8% 24.7% 24.4% Net Profit 9102.6 9223.7 12619.4 10974.7 10096.2 11278.2 Growth (%) 1.3% 36.8% -13.0% -8.0% 11.7% Net Profit Margin (%) 15.6% 14.9% 19.2% 15.3% 13.5% 13.9% Diluted EPS (INR) 11.0 11.2 15.3 13.3 12.2 13.7 P/E 17.5 14.5 9.5 11.4 12.4 11.1 BVPS 82.3 88.9 99.4 104.1 112.0 120.7 P/BV 2.3 1.8 1.5 1.5 1.4 1.3 EV/EBITDA 13.2 13.9 10.7 11.6 11.6 11.1 RoE % 13.4 12.6 15.4 12.8 10.9 11.3 RoCE % 10.0 7.4 8.5 7.5 7.4 7.3 1 7 J u n 1 3 1 7 - J u l - 1 3 1 7 - A u g - 1 3 1 7 - S e p - 1 3 1 7 - O c t - 1 3 1 7 - N o v - 1 3 1 7 - D e c - 1 3 1 7 - J a n - 1 4 1 7 - F e b - 1 4 1 7 - M a r - 1 4 1 7 - A p r - 1 4 1 7 - M a y - 1 4 1 7 - J u n - 1 4 NTPC SENS EX
We rate NTPC Ltd (NTPC) a “STRONG BUY”. NTPC, a government-owned enterpris(Government of India’s stake at 75%), is India’s largest power generator, with operationalthermal capacity of 41.7GW. It contributes to 30% of all power generation in India. NTone of the safest bets in the power utility space given the company’s dominant positionin electricity generation, better fuel supply arrangements (FSAs) and robust powerpurchase agreements (PPAs). Earlier we have recommended the stock with a “STBUY” rating in our ICR note on 18th of April, 2013 and since then we have maintain ourpositive bias on the stock. The current market price is not taking cognizance of the growthin capacity and regulated nature of the business. Unlike the past, we believe executionissues will no longer hinder the stock performance. We see upside momentum of NTPC’searning for FY15E. Therefore we recommend a “STRONG BUY” with a target price of I182.
Capacity addition pace to dramatically improve over FY12-17E- Unlike under the 10th a11th five year plans (FYP), when NTPC missed its capacity-addition targets by 2.2GW and12.8GW, respectively, for the 12th FYP, its capacity addition target of 14GW appearsachievable, as capacity additions are front-end loaded. Over FY13-17, we expect it to add14GW of capacity - an average of 3.3GW/year v/s historic average of 1.5-2GW/year. Thisprovides strong revenue visibility for NTPC over the next three years, making it betplaced than other developers. Better fuel sourcing ahead- NTPC has assured coal linkages for 90% of installed capacityand it is partly better placed to address incremental fuel requirement given captive mines.NTPC has seven captive coal mines with reserves of 3BT as compared to expected annualconsumption of 218MT in FY17,NTPC plans to meet 20% of its coal demand from captivemines by FY17.It is in a comfortable position when it comes to coal imports given its PPAstructure, which allows fuel cost pass-through. We remain upbeat on fuel supply security.Scalable and de-risked business model- The Company is a regulated utility with CERdetermined tariffs allowing it to recover a return of 15.5% on a pre-tax basis, for projectscommissioned on or after 1 April 2014, NTPC would be eligible for an additional 0.5%return on equity if the project is completed within the stipulated timeframe.NTPC hassigned PPAs with states for 37GW of fresh capacity. Hence, NTPC will remain a pure-playregulated model during 12th and possibly 13th plan. SEBs’ Default- No Risk for NTPC- NTPC has a strong payment escrow security mechanism.In case of non-payment of receivables from the SEBs after 90 days grace period, NTPC candirectly recover the dues from Central Government grants to the respective states. NTPCrealized 100% a ment of bills from the customers for 9th successive ear.
NTPC posted revenue of INR 210 Bn for 4QFY14, up by 4% YoY, but in line with Bloomberg consensus estimates. Fuel costper unit stood at INR 2.47/unit. EBITDA for the quarter stood at INR 45Bn.NTPC managed its EBITDA margin in the range of25-26% during FY2014 which is commendable.PAT for the quarter stood at INR 31 Bn.
NTPC has reported a PLF of 81.5% in FY14, a decline of 158 BPS yoy. PAF, the key operating metric for coal-based thermalpower stations, up by 709 BPS yoy to 100% in Q4FY14 and grew by 416 BPS to 92% in FY14.Company has reported a Gas-based TPS of 35.7% in FY14, the reason for the lower PLF for the gas-based TPS is the decline in KG D6 gas. NTPC add1.8GW and commissioned 1.6GW of projects which is in line with its management guidance.
The company received approximately 150mt of domestic coal with 94% materialization against ACQ.NTPC received 43.34MMT of coal in Q4FY14 vs. 41.88 MMT in Q4FY13. Imported coal also increased to 2.34 MMT vs. 1.93 MMT in Q4FY13.Accordingly, blending ratio increased to 5.1% vs. 4.4% YoY leading to increased fuel cost but higher PLF in Q4FY14.
NTPC has consistently reported availability of approximately 88-92% against normative norms of 85%. NTPC’s PLF (plant loading
factor) and PAF (plant availability factor) are highest among the operational power plants in the country. This has enabled NTPC toearn better returns than allowed by regulator. For NTPC, the outlook on efficiency income for its newly commissioned plants hasdeteriorated on availability concerns - we are of the opinion that current stock price is factoring in the worse.
Regulatory assets provide earnings stability – NTPC operates in a regulated environment, which makes its earningssteady and secure. We believe the company’s growth will be sustained led by its regulated business model and reasonablegrowth in capacity addition. Existing as well as assets under construction for NTPC will operate on a regulated basis for aforeseeable future. NTPC remains on firm footing with 107GW of regulated PPA in hand.
High Collection Efficiency
Payment Security Mechanisms- Tripartite Agreements between Government, RBI and
each state in terms of the Scheme for One TimeSettlement of SEB dues valid till October 31, 2016.
Recourse to Reserve Bank of India (RBI) in case ofdefault in making payment .
NTPC’s dividend payout has moved in a tight band of 33%-35% of adjusted PAT since its IPO in November 2004. Ourearnings expectations have limited risk, given we have factored no upside to 14 GW addition. Also, apart from beingbroadly on track in achieving commissioning targets for FY15E, its focus on maintaining healthy PAFs at the firm level is alsobearing fruit. There has been discussion surrounding potential change in dividend payout policy and if that materialize thanwe could expect a higher payout ratio.
CERC Regulations for 2014-19 – Only Overhang for NTPC
Acquisition Of Regulated Assets – Possibly the best upside trigger on the stock
Source: Company, Microsec Research
Source: CERC, Microsec Research
The Central Electricity Regulatory Commission (CERC) has divulged the Tariff regulations for the central power utilities forFY2015-19. The CERC 2014-19 tariff regulations will lead to lower RoE for NTPC as Incentive will be based on PLF ratherthan PAF and tax to be calculated on actual basis. Furthermore Station Heat rate reduced to 2375 Kcal/Kwh for more than500 MW.
CERC regulations are a negative for NTPC as the stock has corrected substantially post the new tariff regulations. But thegood news is that the above adverse event has already factors in the stock price as the stock is trading at 1.2x FY16E P/BV.We assume, PLF should increase from current low levels, leading to higher incentives and efficiency gains. We also expectNTPC to commission 3.3GW annually over FY13-17E, a significant jump over the 11th plan run rate, supported by fasterexecution and prior period slippages.
2004-09 2009-14 Expectation for 2014-19 ImpactROE 14% post tax 15.5% pre tax 15.5% + 0.5% for timely completion; without tax grossing up benefits NegaDepreciation 3.6% + AAD 5.28% 5.28% for 12 years and 2% thereon Neutralncentives 80% PLF 85% PAF Shift from PAF to PLF; INR 0.5/unit incentive for PLF above 85% Negat
Changes in CERC regulations
Nega
Posit2.0 ml/kwh 1.0 ml/Kwh 0.50mn/MW
2,450 2,425
SFOconsumption
Nega
Working
capitalcalculation
2375
Coal inventory (1.5months), SFO inventory (2months), O&M expenses (1month) and maintenancespares (@ 1% capital cost)
Coal inventory of 15 days for pit-head generation and 30 days fornon-pit-head generation at normal capacity and maintenancespares at 20% of O&M expenses.
SHR (500MWand above)
As per market grapevine, NTPC is scouting for regulated assets which have a solid coal linkage. Media reports stronglyassert that, company is in preliminary talks with L&T for acquisition of L&T’s 1,400 mw Rajpura power plant in Punjab. Webelieve, NTPC is in a best position to do acquisitions given its strong balance sheet and strong operating cash flow.
The new combative NTPC augurs well for the investors as it will send a strong signal of high growth rate in the comingyears. Even though there are several desperate sellers in the market due to the leveraged balance sheet, we believe NTPCwould only want to scout for regulated assets as its portfolio of projects does not include any non-regulated projects
NTPC is trading at a deep discount to its historical average. The stock hasunderperformed the broader market over the past one year, mainly due to CERC tariffregulations for 2014-19 – which had a sentimental impact on the stock price. It tradescheaper than many regional peers despite better RoEs and growth. For 12% overall ROE,4.2% dividend yield and 8% net worth CAGR over FY12-15E, the stock trades at 1.2xFY16E P/B. We believe it should trade at a premium to over-leveraged IPPs.
We prefer NTPC over other IPPs over the longer term due to (a) a scalable and de-riskedbusiness model, (b) a strong balance sheet and (c) maintenance of thermal availabilitythrough fuel imports in the near term and coal mining in the longer term.
NTPC offers better growth option than any other listed player in an uncertain macroscenario. 16GW of capacity is under construction, while an additional 10GW is undertendering stage. This provides visibility even beyond the 12th Plan period compared togrowth holidays for many IPPs that are unable to take up new projects, given stretchedbalance sheets, issues with existing projects.
At the CMP of INR 152 per share, NTPC is quoting at 1.36x and 1.26x its FY15E and FY16E
price to book value (P/B), respectively.
We have used the discounted cash flow (DCF) method to value NTPC. We have assigneda WACC of 11.14% and assumed a terminal growth rate of 3%. Our DCF based pricetarget is INR 182 which shows an upside potential of 21% from the current market priceof INR 152. Hence we recommend a “STRONG BUY” for the stock from long termperspective.
Key Risks
Unforeseen disruptions in coal mining at owned blocks-
Coal India plans to supply only 80% of LOA to NTPC’s plants which were commissionedafter FY09, leaving NTPC to source the remaining coal from imported sources or its ownmines. Thus, any delay in coal mining could supress PAF for NTPC’s plants.
Slower than expected capacity additions-
Delays in capacity commissioning are not new to NTPC. Continued delays could limit itsearnings growth.
SEB’s lower drawl to affect incentive income-
Apart from fixed ROEs, NTPC earns incentive income under the UI and heat-rate incentiveschemes. Such incentive income can get affected by lower demand for power from SEB.
Net Increase in Cash and Cash Equivalents 4062.40 1338.40 (2021.27) 1332.08 (73.10) 561.45 (2097.04) 6
Cash and cash equivalents At the beginning 13314.6 14933.2 16271.6 14459.48 15791.56 16146.11 16,707.56 14Net Increase in Cash and Cash Equivalents 4062.40 1338.40 (2021.27) 1332.08 -73.10 561.45 -2097.04Cash and cash equivalents At the end 17377.00 16271.60 14,250.33 15791.56 15718.46 16707.56 14610.52 15
