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National Thermal Power Corporation (NTPC) - Investment Thesis

Mr. Rahul Singh | Posted On Monday, October 13,2008, 02:48 AM

National Thermal Power Corporation (NTPC) - Investment Thesis



Company description
NTPC is the largest power generation company in India. It was set up in 1975 during the fifth five year plan. Since then it has grown into one of the world's largest and most efficient power generation companies. It has an installed capacity of 29,394MW (as of today) which accounts for almost 30% of total installed capacity in India. It has 15 coal based power stations (23,395 MW), 7 gas based power stations (3,955 MW) and 4 power stations in Joint Ventures (1,794 MW). It aims to reach a capacity of 50,000MW by the end of FY12. To de-risk its portfolio, it plans to diversify into hydro as well as nuclear generation. Further, as per its forward integration plans, it also endeavors to foray in power distribution.

Key investment highlights
• Outlined detailed expansion projects during XIth and XIIth Plan representing 24% of country’s planned generation capacity addition
• Enjoys significant growth option across entire spectrum: transmission, distribution, coal mining, merchant power plants, gas exploration
• Efficiency incentives results in ROE from core business at 21% vs 14% permitted by Central Electricity Regulatory Commission (CERC)
• JVs with BHEL to manufacture power equipments and EPC contracts for the power projects
• JVs with European firms to set-up Nuclear Power plants to diversify its offerings
• Growth will not be equity dilutive (unless government goes for secondary offering)

Key drivers
• High Plant Load Factor (PLF) for coal-based plants (~90%) and Gas-based plants (~70%)
• Forward integration by securing coal fields for its projects
• Expertise in execution of large scale projects on time and well-trained manpower
• Technology is and would be the key driver of competitiveness; NTPC has engaged in continuous technology upgradation
• Continuous process improvement is a big advantage for NTPC which helps it to increase PLF

Sector views
One the few sectors in India where demand is much more than the supply. According to the Central Electricity Authority (CEA), the peak power and energy shortages in India had grown to 13.2% and 9.3% respectively in FY07. This makes power sector extremely interesting and attractive. It offers significant growth potential which could be in multiples of the current size.

Key Regulatory
• All future power procurement by distribution licensee on a competitive tariff-based bidding basis
• Fixed return on equity (ROE) of 14% for the power generators
• The retail tariffs to be rationalized in a phased manner with transparent subsidy payment requirements

Key risks
• Slow down in the reform process would negatively impact its growth plans
• Capital crunch may derail its expansion plan; it has been waiting for government approval to raise additional capital from market by issuing equity
• Shortages of fuels (coal or gas) and lack of availability of equipments
• Increased competition from aggressive and deep-pocketed private players such as Tata and Reliance Power
• Any change in tariff policy by CERC will alter NTPC’s earnings.








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I believe NTPC should trade at premium valuations among its peers because

1)       It is a quasi-government organization

2)       It has better operating parameters (e.g, highest PLF ~90% for coal-based plants and lower IO&M costs) than its peers, leading to higher returns

3)       It shows reasonable clarity on growth plans – 17GW of 23GW of expected capacity addition in FY08-12 is already under construction. Yet the valuation multiple – P/BV of 2.5x FY09E and P/E of 9.4.0x FY09E indicated that the stock is undervalued and has significant upward potential.


I believe 2.5x FY09E BV only values NTPC’s core business, with expected RoE of 14% and BV growth of 8% over FY08- 12E. What remains to be valued is the option value of the equipment, EPC JVs and any upside from merchant capacity building leading to higher return ratios. I believe a P/BV of 2.5x FY09E leaves room for an upward rerating as developments in coal-mining and equipment JVs take shape. I see NTPC as a growth and value opportunity at current share price levels.


Stock View

Maintain overweight

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