Stock Review: National Thermal Power Corporation (NTPC)

The National Thermal Power Corporation (NTPC) scrip has declined 15 per cent in 2010, as against a12 per cent rise in the Sensex, courtesy delays in capacity addition, subdued financial performance for the past few quarters and poor response to its follow-on public offer. After a correction in October-November, the stock has bounced back seven per cent in December, as compared to a marginal gain of 0.7 per cent in the Sensex in the same period.

Many analysts find the risk to-reward ratio favourable and feel negatives have already been factored into the stock price, which now trades at a reasonable valuation of 14 times and two times 2011-12 average estimated earnings and book value, respectively.

At present, merchant power and unscheduled interchange charge rates are under pressure. Fuel security is also becoming a hurdle for the execution of power projects. In such a scenario, NTPC – with its regulated business model and the comfort of coal availability (supply agreements with Coal India) and prices (pass-through of escalated fuel costs) – provides better earnings visibility, despite expected rising dependence on the costly imported coal (seven per cent of 2009-10 total consumption).

Also, the company's capacity ramp-up is happening at a faster rate, with an average expected annual capacity addition rate of 3,250 Mw in FY11-FY12, as compared to 1,430 Mw in FY08-FY10.

Though the competitive bidding mechanism is starting from January 2011, NTPC is unlikely to be affected, as it is going to tie up for 75,000 Mw under the regulated model by the same period, but analysts expect it to achieve an operational capacity of around 66,000 Mw only by 2016-17 (end of the 12th plan).

To avoid delays in the supply of boiler-turbine-generator (BTG) required for the commissioning of capacities in the 12th Plan and to achieve the management's guidance of 75,000 Mw by FY17, NTPC aims to award BTG contracts of 30,000 Mw (including the bulk tender) over the next two years. Analysts seem impressed with the company's efforts to minimise slippages.

The company is being increasingly looked at as the best value buy in the utility space