TALWALKARS BETTER VALUE FITNESS LTD : FITS THE BEST AS VALUE PLAY !!!

Scrip Code: 533200 / TALWALKARS

CMP:  Rs. 118.95; Buy at Rs. 113 - 119 levels.

Short Term Target : Rs. 150.00; Medium to Long term Target: Rs. 190; STOP LOSS – Rs. 110.40; Market Cap: Rs. 314.17 Cr; 52 Week High/Low: Rs. 223.70 / Rs. 109.05;

Total Shares: 2,61,80,888 shares; Promoters : 1,43,40,923 shares –54.78 %; Total Public holding : 1,18,39,965 shares – 45.22 %; Book Value: Rs. 77.25; Face Value: Rs. 10.00; EPS: Rs. 10.69; Dividend: 15.00 % ; P/E: 11.19 times; Ind. P/E: 13.09; EV/EBITDA: 5.58

Total Debt: Rs. 139.97 Cr; Enterprise Value: Rs. 430.34 Cr.

TALWALKARS BETTER VALUE FITNESS LTD: The Company was founded in 1932 and is based in Mumbai, India.  Talwalkars Better Value Fitness Limited (TBVF) was formerly known as Talwalkars Better Value Fitness Private Limited. The company operates a fitness chain in India. The company offers a suite of services, including gyms, spas, aerobics, nutrition counseling, physiotherapy guidance, yoga classes and health counseling under the ‘Talwalkars’ brand.  The Company has an 8,000 square feet residential training academy at Thane. The training academy offers about 4 to 6 weeks of training program for its staff joining at the new centers.  It has 128 health clubs comprising 15 franchised gyms under HiFi brand and in 68 cities and had more than 75,000 members. Its health clubs/training centers are located in Andhra Pradesh, Gujarat, Karnataka, Kerala, Maharashtra, Madhya Pradesh, Punjab, Rajasthan, Tamil Nadu, Uttar Pradesh and West Bengal. In April 2012, Talwalkars through its subsidiary opened a health club in Gandhinagar. In April 2013, it opened its six new health club one each in Ahmedabad, Hyderabad, Kolhapur, Kalwa, Mira Road and Surat. As of June 2013, it operated 144 gyms in 75 cities in India. The company is globally compared with Misonoza Theatrical Corporation of Japan, Media Create Company Ltd of Japan, Social Ecology project Company Ltd of Japan and with Kaquetsuenkanko Co.,Ltd which is also based in Japan.

Investment Rationale:

The management stated that as of August 2013 it had 102 owned Talwalkar centers, 15 through subsidiaries, 7 through franchise and 6 through trade marks , it also had 15 Hifi centers. Talwalkars has alliance with Zumba fitness - a latin dance inspired fitness plan has 1.4 Cr people taking weekly Zumba classes in more than 1,40,000 location across more than 151 countries. Talwalkar in the current quarter has expanded its presence in different segments like weight loss brand name “Reduce”, alternate form of fitness Zumba and NuForm. The company has extensively increased the number of “Reduce” centres to 44 from 17 in the last quarter, increasing administrative expenses this quarter. Zumba centres have increased to 31 from 29 on a QoQ basis with over 300 certified Zumba trainers. The new initiatives with premium pricing have helped the company to leverage on its current asset and enhance its member base without incurring any major capex. Some of these activities can also be developed as standalone services outside the fitness centre. Currently, large corporates, including MNCs, are availing the Zumba programme and NuForm. The company is actively looking at other avenues like schools, colleges, home based services, etc. TBVF has also extensively increased the number of “Reduce” centres to 44 from 17 in the last quarter. “Reduce” is also offered as “Home based Reduce”, primarily catering to HNI and corporates at their door step. This is an minimal capex required model. Hence, it has an incremental positive impact on the profitability of the fitness centre. These new initiatives have helped the company to leverage on its current asset and enhance the member base without incurring any major capex. Pricing for new initiatives is at a significant premium. This would help the company to improve its margins, going forward. Talwalkars has also tied up with David Lloyd Leisure: which has over 30 years of unmatched experience in the development and operation of leisure and sports clubs. The very same insights and know-how will now be available to Talwalkars for starting and consulting for sports and leisure clubs in India. TBVF’s HiFi gyms capex requirement is about half of a full service gym and their membership rates are 60 % of those for regular gyms. The company is rolling out HiFi gyms through the franchisee route thereby eliminating funding needs for roll out. In return for gym management, TBVF will earn royalty income at the rate of 6 % of revenues for first three years and 8 % thereafter. Talwalkars would also receive a one-time royalty income and equipment supply charge to the tune of Rs.10,00,000 each. HiFi gyms offer faster roll out since each roll out usually takes 8-10 weeks compared to 14-16 weeks for typical Talwalkars gym.

Outlook and Valuation:

Talwalkars Better Fitness Value ltd is a play on the growing healthcare market in India. It has a strong brand name and is now capitalizing, with rapid expansion. Gym is a highly localized business in the sense it needs to be easily accessible to local population at an affordable price (at least from a mass market perspective). Talwalkars has managed to break away from its peers and now leads the scale pack with 145 gyms on consolidated basis. There is a vast opportunity exists for further scale building considering the fragmented nature of industry. For instance, market share of the top 5 players by no. of clubs is just 16 % compared to global top 5 average of about 40 %. Talwalkars has a decent spread-out across the North, West and South regions which together accounts for 94 % of the total gyms. It is also targeting different price segments with roll out of both regular as well as ‘low cost’ HiFi gyms especially in those tier II/III cities which may not support a full service Talwalkars’ gym. Talwalkars Better Value Fitness (TBVF) performed better than the market expectations on the topline front in Q1FY14. The Operating revenues grew by 31 % YoY to Rs. 37.4 crore mainly attributable to new initiatives such as NuForm, Zumba® and Reduce, accounting for around 18-22 % of the turnover. The Operating margins were in line with the markets estimates while the employee costs moderated to 2 % during the quarter. However, one-time administration expenses incurred on the launch of Reduce kept the EBITDA flat YoY. Though finance costs increased 18 % YoY, PAT has increased 22.6 % YoY to Rs. 3.2 crore due to various cost efficiencies. Despite the bad monsoons taking a hit on member additions the company was able to meet expectations and it is expected that there will be a renewed stimulus in demand from the next quarter for both its value-added and flagships products. There are not any listed comparable players and thus its closest comparable peers are the consumption companies like Jubilant Food works, Page Industries, Titan Industries etc which trades at an average PE of 28x to 36x, internationally the firms owning sports and fitness centers have been valued at an Ev/EBITDA of 6 to 9 times, while Talwalkars enterprise value stands at 5.39 times its EBITDA. At the current market price of Rs. 118.95, the stock is trading at 7.43 x FY14E and 5.53 x FY15E respectively. Earnings per share (EPS) of the company for FY14E and FY15E are seen at Rs. 16.00 and Rs. 21.50 respectively. It is expected that the company will keep its growth story intact in the coming quarters also. One could BUY TALWALKARS BETTER VALUE FITNESS LTD with a target price of Rs. 190.00 for Medium to Long term investment and for the SHORT TERM PLAYERS it should be Rs. 150.00 

KEY FINANCIALS	FY12	FY13	FY14E	FY15E
SALES (₹ Crs)	130.50	168.80	212.30	267.80
NET PROFIT (₹ Cr)	22.00	30.10	42.00	56.40
EPS (₹)	9.10	11.50	16.00	21.50
PE (x)	14.20	11.30	8.10	6.00
P/BV (x)	2.20	1.60	1.40	1.10
EV/EBITDA (x)	8.50	6.50	5.10	4.00
ROE (%)	15.30	14.40	16.80	18.40
ROCE (%)	14.60	15.50	17.70	20.20

I would buy TALWALKARS BETTER VALUE FITNESS with a price target of ₹ 150 for Short term and for the Medium to Long term the target would be ₹ 190. 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 ₹ 110.40 on every purchase. (Why Strict stop loss of 8 % ?) - Click Here

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ENGINEERS INDIA LTD: A DEBT FREE WITH HUGE UPWARDS POTENTIAL !!!

Scrip Code:  532178 / ENGINERSIN

CMP:  Rs. 123.95; Buy at Rs. 124 levels.

Short term Target: Rs. 150; Medium to Long term Target: Rs. 225; STOP LOSS – Rs. 114.08; Market Cap: Rs. 4,176.32 Cr; 52 Week High/Low: Rs. 257.25 / Rs. 121.70.

Total Shares: 33,69,36,600 shares; Promoters : 27,09,00,540 shares –80.40 %; Total Public holding : 6,60,36,060 shares – 19.60 %; Book Value: Rs. 66.41; Face Value: Rs. 5.00; EPS: Rs. 18.66; Dividend: 120.00 % ; P/E: 6.64 times; Ind. P/E: 7.32; EV/EBITDA: 4.83.

Total Debt: NIL; Enterprise Value: Rs. 4,163.94 Cr.

ENGINEERS INDIA LIMITED: ENGINERSIN was founded in 1965 and is headquartered in New Delhi, India. Engineers India Limited, an engineering consultancy company, providing designs, engineering, procurement, construction, and integrated project management services principally for the oil and gas, petrochemicals, fertilizer, and LNG industry segments in India and internationally. The company operates in two segments - Consultancy and Engineering Services, And Turnkey Projects. It offers pre project services, such as feasibility studies, environment impact assessment, technology and process licensor selection, and cost estimation services; and project implementation services, including project management, process design, detailed engineering, procurement, construction management, and commissioning and plant start-up assistance services. The company also provides project management consultancy services; and specialist services comprising heat and mass transfer equipment design, environment engineering, information technology, specialist materials and maintenance, plant operations and safety, refinery optimization studies, and yield and energy optimization studies. In process design services it provides conceptual designs and feasibility reports; design packages for open art process units for gas-processing and refineries and integrated utilities and offsite facilities, and offers a portfolio of more than 30 process technologies for application in oil and gas processing sector. Construction management services include services at site, including warehouse management, quality control and assurance, Health Safety and Environment (HSE), progress monitoring and scheduling. In addition, the company offers engineering, procurement, and construction and commissioning services; services related to certification, re-certification, safety audit, and onshore oil and gas facilities; and third party inspection for equipment and installations in the hydrocarbon and other sectors. It also serves non-ferrous mining and metallurgy, power, and infrastructure industries, as well as the Government of India. The company is locally compared with Mukand Engineers Ltd, RJ Shah & Company Ltd, Reliance Industrial Infrastructure Ltd, Shriram EPC Ltd, SPML INFRA Ltd, HOV Services Ltd, Hindustan Dorr-Oliver ltd, AIA Engineering Ltd and Sunil Hitech and Globally compared with Samsung Engineering from South Korea, Hyundai Engineering & Construction of South Korea, Petrofac from Middle East, Saipem from Abu Dhabhi, National Petroleum Construction Company of Middle East, Technip from French, Technicas Reunidas from Spain, Jacobs Engineering from California, Watabe Wedding Corporation of Japan, central Security Patrols Company Limited of Japan, Mortice Ltd of Singapore.

Investment Rationale:

EIL is a consultancy company & EPC contractor in the fields of petroleum refining, petrochemicals, pipelines, oil & gas terminals & storages, fertilisers, mining and metallurgy and infrastructure projects. The company is also working in diversified areas of water & waste management and has made inroads into the areas of nuclear, solar and thermal power. It has also expanded its operations internationally, and has provided a wide range of engineering consultancy services in the Middle East, North Africa and South East Asia. Management believes that the company will benefit from several pending orders from various PSU refineries over the next few years. Company believes that HPCL Ratnagiri refinery and petrochemical project which is estimated to cost Rs. 35,000 Cr might flow in Q4FY14 or FY15. Management believes that this PSU project could entail consultancy opportunity to EIL of nearly Rs. 1500 Cr to Rs. 2000 Cr. Engineers India (EIL) posted a YoY sales de growth, the fifth one in a row. Its Sales declined by 38.4 % YoY, mainly on account of a 66 % de-growth in Lump Sum Turnkey (LSTK) projects. EBITDA margins improved on account of higher share of consultancy revenues and better margins there. Other Income also de grew by 7.1 % YoY AT Rs. 68.03 Cr, PAT stood at Rs. 129.34 Cr, down 16.2 % YoY. Capital employed increased by 18.4 % YoY at Rs. 2340 cr. Company’s Consultancy EBIT margins in Q1FY14 stood at 39.2 % down by 2.40 % YoY and LSTK projects experienced a 3.30 % decline YoY to 7.1 %. The share of Consultancy in overall sales was 67.5 % as against 40.2 % in Q1FY13. EIL’s current order book stands at around Rs. 2960 Cr and the order inflow for Q1FY14 stood at Rs.110 Cr. EIL has meaningful investment in XII year plan in Hydrocarbon space which offers immense business opportunity. Company’s consultancy business enjoys strong margins and will continue for coming quarters also. Company’s current order backlog is around Rs. 2100 Cr in consultancy business. EIL has limited exposure of around 8% in overseas geographies which is expected to increase over a period of time.

Outlook and Valuation:

EIL, one of the leading designs, engineering consultancy and EPC companies of the country secured a Lump-Sum Turnkey Contact (LSTK) worth over Rs. 670 Cr from Chennai Petroleum Corp Ltd for construction of residuary up gradation project of Coker Block unit that will convert residual oil in the refinery into fuel. A coker or coker unit is an oil refinery processing unit that converts the residual oil into low molecular weight hydrocarbon gases, naphtha, light and heavy gas oils, and petroleum coke. The CPCL project comprises of delayed Coker Unit and LPG CFC Treating Unit. EIL's scope of work involves project management, residual process design, detailed engineering, procurement, inspection & expediting, tendering, construction management & supervision including quality assurance, assistance in start-up, pre-commissioning, commissioning & guarantee test runs for units and facilities of plant. The company statement says that the company won this job against competition from national and international companies in this field. EIL has envisaged a strategy of entering into joint ventures and strategic alliances with the appropriate players in India and abroad in order to widen the spectrum of offerings/ opportunities and to reduce systematic risk associated with various industries and geographies. The company currently has nearly ten such alliances including three overseas JVs. Company continues to win orders in international geographies mainly Middle East and expects further momentum through FY14. Management has stated that the company enjoys margins similar to domestic jobs in the international projects. Currently company derives nearly 10-12 % of revenues from international jobs and expects it to maintain going ahead. EIL has recently won the order from CPCL which will start contributing towards the end of this year. Orders in consultancy may provide some cushion to the margins, going forward. However, inflow continues to remain weak. Execution cycle for the current order book is stretched at two years. Thus, a revenue de-growth is expected in FY14E too. The stock is currently trading at 8.6x FY15E EPS with a negative bias in case the order inflow scenario slumps. The company’s FPO is planned in Q2FY14E. However in the turning O&G scenario the company will turnaround faster thus one can buy into this stock. At current price of Rs. 123.95, the stock is trading at P/E of 7.55 x for FY14E and 7.94 x the FY15E. EIL could post EPS of Rs. 16.40 for FY14E and Rs. 15.60 for FY15E. EIL stock has corrected significantly in the past few trading sessions partly on anticipation of probable equity dilution through FPO and possible delays in key refinery projects that would likely defer earning accretion in the current year. The stock is attractively valued at the current price but would likely underperform the broader market until clarity on anticipated equity dilution/FPO is received. However, the business of EIL continues to remain positive on the long term. One can 'BUY' on to EIL with an Short term price target of Rs 150 and for Medium to Long term investment it would be for Rs. 250.

KEY FINANCIALS	FY12	FY13	FY14E	FY15E
SALES (₹ Crs)	3,698.80	2,505.90	2,405.70	2,598.10
NET PROFIT (₹ Cr)	636.50	618.10	551.80	524.10
EPS (₹)	18.90	18.30	16.40	15.60
PE (x)	7.10	7.30	8.10	8.60
P/BV (x)	2.40	2.00	1.80	1.60
EV/EBITDA (x)	4.10	4.30	3.80	3.40
ROE (%)	38.70	30.30	23.10	19.50
ROCE (%)	38.70	30.20	23.10	19.50

I would buy ENGINEERS INDIA LTD with a Short term price target of ₹ 150.00 and for the Medium to Long term target it would be Rs. 250. 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 ₹ 114.80 on every purchase. (Why Strict stop loss of 8 % ?) - Click Here

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RUPA & COMPANY LTD : SLOW & STEADY WINS THE RACE !!!

Scrip Code: 533552 / RUPA

CMP:  Rs. 165.00; Buy at current levels.
Short term Target: Rs. 205, 6 month Target – Rs. 250; STOP LOSS – Rs. 151.80; Market Cap: Rs. 1,312.16 Cr; 52 Week High/Low: Rs. 194.80 / Rs. 122.50

Total Shares: 7,95,24,560 shares; Promoters : 5,95,86,390 shares –74.93 %; Total Public holding : 1,99,38,170 shares – 25.07 %; Book Value: Rs. 31.76; Face Value: Rs. 1.00; EPS: Rs. 8.10; Dividend: 150 % ; P/E: 20.37 times; Ind. P/E: 11.94; EV/EBITDA: 11.36.

Total Debt: 168.34 Cr; Enterprise Value: Rs. 1,474.82 Cr.

RUPA & COMAPNY LTD: Rupa was incorporated in 1985 by the Agarwala brothers. In 1995, they took over the business of Binod Hosiery, a partnership firm incorporated in 1979. They have emerged, over the years, as the largest hosiery manufacturer in India. The company produces and markets knitted garments such as innerwear, casuals wear and also footwear. The company launched Thermocot, the first branded winter wear in India. The company is also pioneered in printing of the brand name in front of the vest. This made the logo as a design element which made the product to be flaunted. RUPA is one of the earliest brands which introduced celebrity endorsement. This created huge impact and recall value. The Company has a comprehensive portfolio of product offerings in the knitted innerwear, casual wear and thermal wear segment for men, women and kids. The company offers its products principally under the brand name Rupa viz, Rupa, Rupa Frontline, Jon, Air, Macroman, Macroman M' Series, Euro, Kidline, Bumchums, and Thermocot. Rupa & Company Limited sells its products primarily through own retail outlets, as well as through independent retailers in India and the Middle East. The company also exports its products. The Company manages more than 2000 Stock Keeping Units (SKUs), each of them for a particular brand, segment colour and size. The Company has its two wholly owned subsidiaries- M/s Euro Fashion Inners International Private Limited which sells premium men’s innerwear products under the brand “EURO” and Imoogi Fashions Private Limited which has recently launched apparel for kids of 0-12 years of age under the brand “IMOOGI”. Rupa also operates a Wind mill for power generation. The company is locally compared with Lovable Lingerie Ltd, Page Industries Ltd, V2 Retail Ltd , Trent Ltd, Brandhouse Retail, CESC Ltd, Future Retail, Arvind Ltd, kewal Kiran Clothing Ltd, S Kumars Nationwide Ltd, Koutons Retail Lyd, Maxwell Industries Ltd and Globally with I.T Limited of Hong Kong, Dickson Concepts (International) Limited also from Hong Kong, Industria DE Diseno of Spain, Inditex SA of Spain, Gunze Ltd of Tokyo, Levi Strauss & Co of US, Gucci Group NV of Netherlands, Tommy Hifiger BV of Netherlands, Marc Jacobs International LLC of USA Calvin Klein Inc of USA and Donna Karan International Inc. form USA.

Investment Rationale:

Rupa & Company is the number one knitwear manufacturer in India in terms of revenues of Rs. 829 crore for the year ended FY12. Rupa sells more than 12 million pieces of inner wear every month. Rupa’s competitive advantage lies in its owned Brands which have grown over the years, a product line range named $ DOLLAR as a brand across all categories, a formidable reputation of “Great Quality at Great Price points”, and a fact that it accepts the buyer’s specification. Due to decades-long experience in successfully launching, nurturing and managing several winning brands in a pre-dominantly unorganized industry, RUPA & Co is acclaimed by the Limca Book of Records as the largest hosiery and innerwear manufacturing and marketing company in India, for a record eight consecutive years. Also RUPA is the first Indian company to launch bacteria-resistant briefs under its exclusive brand Euro. Rupa & Company Limited own three state-of-the-art manufacturing facilities at Delhi, Tirupur and Domjur with an overall capacity to produce 7,00,000 pieces a day. It has one of the largest distribution networks through 1 lakh retail outlets across 600 locations with a dedicated support of more than 950 dealers and distributors. The company is looking for an aquisition locally. The company’s June 13 quater net sales registered a 11.44 % increase and stood at Rs. 195.63 Cr from Rs. 175.54 Cr over the corresponding quarter last year. The company’s net profit registered a 27.77 % increase and stood at a record Rs. 14.26 Cr from Rs. 11.16 Cr over the corresponding quarter last year. Net Sales & PAT of the company are expected to grow around a CAGR of 13 % and 32 % over 2013 to 2015E respectively.

Outlook and Valuation:

India is the one of the world's largest producers of textiles and garments. The potential size of the Indian textile and apparel industry is expected to reach US$ 22,100 Cr by 2021, according to the reports by Technopak's Textile and Apparel Compendium 2012. Textile industry has made a major contribution to the national economy in terms of direct and indirect employment generation and net foreign exchange earnings. This sector contributes about 14 % to industrial production, 4 % to the Gross Domestic Product, and 17 % to the country's export earnings. It also provides direct employment to over 3.5 Cr people. The textiles sector is the second largest provider of employment after agriculture in India. Thus, the growth and all round development of this industry has a direct bearing on the improvement of the economy of the nation. The textiles sector has witnessed a spurt in investment during the last five years. The industry including dyed and printed, attracted Foreign Direct Investments (FDI) worth Rs. 5,674.45 crore (US$ 104 Cr) during April 2000 to February 2013. At the current market price of Rs. 165.00, the stock P/E ratio is at 15.65 x FY14E and 13.05 x FY15E respectively. The Earnings per share (EPS) of the company for FY14E and FY15E is seen at Rs. 10.54 and Rs. 12.64 respectively. Net Sales and PAT of the company are expected to grow at a CAGR of 13% and 32% over 2013 to 2015E respectively. On the basis of EV/EBITDA, the stock trades at 10.97 X for FY14E and 9.54 X for FY15E. Price to Book Value of the stock is expected to be at 4.89 x and 3.84 x respectively for FY14E and FY15E. It is expected that the company's surplus scenario is likely to continue for the next three years and will keep its growth story in the coming quarters intact. This is an very slow but steady performing scrip an hence,one can ‘BUY’ into this particular scrip with a target price of Rs. 205.00 for Medium to Long term investment.  

KEY FINANCIALS	FY12	FY13	FY14E	FY15E
SALES (₹ Crs)	711.00	829.00	931.78	1,021.23
NET PROFIT (₹ Cr)	43.55	64.77	83.85	100.51
EPS (₹)	5.48	8.15	10.54	12.64
PE (x)	34.15	22.96	17.74	14.80
P/BV (x)	7.56	6.12	4.89	3.84
EV/EBITDA (x)	18.12	13.32	10.97	9.54
ROE (%)	22.13	26.66	27.58	25.98
ROCE (%)	26.62	29.63	30.61	29.78

I would buy RUPA & COMAPNY LTD with a price target of ₹ 205 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 ₹ 151.80 on every purchase. (Why Strict stop loss of 8 % ?) - Click Here

READ HERE TO KNOW MORE ON LONG TERM INVESTING - CLICK HERE

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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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