NTPC: SAFER & BEST PICK IN POWER SECTOR !!!

Scrip Code: 532555 / NTPC

CMP:  Rs. 129.85; Buy at current levels and Accumulate at every dipps. Medium to Long term Target: Rs. 170.00; STOP LOSS – Rs. 119.45; Market Cap: Rs. 1,07,067.35 Cr; 52 Week High/Low: Rs. 175.50 / Rs. 126.55

Total Shares: 824,54,64,400 shares; Promoters: 618,40,98,300 shares – 75.00 %; Total Public holding: 206,13,66,100 shares – 25.00 %; Book Value: Rs. 88.89; Face Value: Rs. 10.00; EPS: Rs. 15.30; Dividend: 40.00 %; P/E: 8.48 times; Ind. P/E: 11.74; EV/EBITDA: 6.68

Total Debt: Rs. 47,338.33 Cr; Enterprise Value: Rs. 1,38,260.04 Cr.

NTPC INDIA LTD: The Company was founded in 1975 and is based in New Delhi, India. NTPC Limited engages in the generation, distribution, and sale of bulk power to state power utilities in India. It generates power from coal, gas, hydro, and liquid fuel sources. The company also undertakes consultancy and turnkey project contracts that comprise engineering, project management, construction management, and operation and maintenance of power plants. In addition, it engages in the oil and gas exploration, and coal mining activities. The Company’s other business includes providing consultancy, project management and supervision, oil and gas exploration, and coal mining. The Company has nearly completed execution two projects: Lata Tapovan hydro electric project (171 mega-watts (MW)), located in Chamoli District of Uttarakhand and Rammam Hydro Electric Project, Stage III (120 MW) located in Darjeeling District of West Bengal and West Sikkim District of Sikkim. The company has approximately 39,174 Megawatts of installed capacity. Company had five subsidiaries: NTPC Electric Supply Company Limited, NTPC Vidyut Vyapar Nigam Limited, NTPC Hydro Limited, Kanti Bijlee Utpadan Nigam Limited and Bhartiya Rail Bijlee Company Limited. NTPC is locally compared with Adani Power Ltd; TATA Power Ltd; Reliance Power Ltd; GVK Power and Infra; Jaiprakash Power ventures; Gujarat Industries Power Company Ltd; PTC India Ltd and CESC Ltd and globally its is compared with Aboitiz Power Corp of US; Abu Dhabi National Energy Co of UAE; Beijing Jingneng Thermal Power Co Ltd of China; Boguchanskaya GES OAO of Russia; Duke Energy International Geracao Paranapanema SA of Brazil; Eden Energy Ltd from Australia;  Electric Power development Co., Ltd of Japan; The Chuqoku Electric Power Company Incorporation of Japan; Hokkaido Electric Power Company Incorporated of Japan.

Investment Rationale:

NTPC has been allocated four coal mines by the Ministry of Coal (MOC) with an aggregate reserve of 2bn tonnes. Two of these mines are in Chhattisgarh and two are in Orissa. A total of 14 mines were allocated with estimated reserves of 8bn tonnes & production capacity of 159mt p.a that should support 32000WMs. The previously, NTPC had been allocated six coal blocks, namely Pakri‐Barwadih, Chatti‐Bariatu, Kerandari, Dulanga, Talaipalli and Chatti‐Bariatu (S), the production pegged from these mines was to the tune of 73m tonnes p.a (or 11000MWs) and the mining was to start in 2010. In 2012, three of the blocks, namely, Chatti Bariatu, Chatti Bariatu (S) and Kerandari were de-allocated on the grounds of a substantial delay in development. Subsequently, they were reallocated to NTPC. The company is yet to start producing from these mines and the total expenditure incurred on mine development till March 2013 was to the tune of Rs. 1200 Cr which is 10% of the total cost. NTPC, however, is expected to start production from its Pakri‐ Barwadih mine from FY14E. The first year production will be close to 2m tonne, which is then expected to scale up to 40m tonnes by the end of 2017. Even if the production ramps up from Pakri‐Barwadih, the Koderma‐Hazaribagh‐Banadag‐ Shivpuri‐Tori railway line, which will carry the output, is getting delayed. However, once these mines get operationalised, the company will earn regulated returns on their investments too. NTPC’s wholly owned subsidiary NTPC Vidyut Vyapar Nigam Ltd has bagged a contract to supply 300Mw round the clock power to Kerala State Electricity Board. The Power Purchase Agreement between NTPC Vidyut Vyapar Nigam Ltd and Kerala state State Electricity Board is estimated to be around 7 billion units of power supply sourced by the former from Chhattisgarh during the contract period. NTPC reported Q1FY14 Revenue at Rs. 15,383 Cr a decline of 3% yoy and EBITDA improved by 15.4% yoy to Rs. 4064.40 Cr due to lower fule expenses. Company reported its PAT which declined 2.6% yoy to Rs. 2,326.3 Cr. However, NTPC has added 500MW in Q1FY14 and expects to add about 1.87 GW in FY14  .  

Outlook and Valuation:

NTPC is targeting captive mining of about 37mmt by FY17 in a bid to secure its fuel supply position. Production at Pakri Barwadih mine (15 million tonnes, located in Jharkhand) is expected to commence in FY14. Even though NTPC imports 6% of its coal requirements, the full pass-through of costs insulates the company from the risks of a depreciating INR. Further, even as the 28% of its borrowings are in foreign currency, complete pass-through provides relief here too. A strong balance sheet provides comfort, its current cash holding is around Rs 70,000 Cr and leverage low at 0.7x. NTPC has outlined 10GW of capacity addition over FY14-FY17, lending strong visibility to growth. The company looks better placed to achieve it commissioning schedules as compared to its private power producers who are still struggling with their capacity addition plans. The company is targeting coal imports of around 16 mmt in FY14, of which orders have already been placed for 7mmt. Further, the project for an inland waterway at Farakka of 2,100 MW is expected to become operational in Q1 of FY14. NTPC has recently signed two models Fuel Supply Agreement with Coal India and expects to sign another FSA for 9 GW capacity for which coal were supplied through MOU’s earlier. NTPC can have PAT CAGR of around 6% over FY13-FY16. At the CMP of Rs. 129.85, the stock is trading at a P/E of 10.47 x FY2014E and 10.06 x FY2015E respectively. Earnings per share (EPS) of company for FY14E and FY15E are seen at Rs. 12.40 and Rs. 12.90 respectively, in my view the Fair Value of NTPC comes at Rs. 170 valuing Standalone Company at Rs. 155/share and valuing its subsidiaries & JV’s at Rs. 15/share and valuing OTSS bonds at Rs. 8/share. One can buy at current levels and accumulate NTPC  at every dips with a target price for Medium to Long term investment of Rs. 170.00 which represents 30% upwards from CMP Rs. 130.00.

KEY FINANCIALS	FY13	FY14E	FY15E	FY16E
SALES (₹ Crs)	65,673.90	72,004.00	74,753.70	80,434.10
NET PROFIT (₹ Cr)	9,493.30	10,238.80	10,623.60	11,225.60
EPS (₹)	11.50	12.40	12.90	13.60
PE (x)	12.40	11.50	11.10	10.50
P/BV (x)	1.50	1.40	1.30	1.20
EV/EBITDA (x)	8.60	8.90	9.20	9.00
ROE (%)	12.40	12.30	11.90	11.70
ROCE (%)	7.80	6.30	5.50	5.80

I would buy NTPC LTD with a price target of ₹ 170.00 for Medium to Long term target. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or ₹ 119.45 on every purchase. (Why Strict stop loss of 8 % ?) - Click Here

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