Stock Review: NTPC

NTPC's stock underperformed broader markets by a good margin in the past year on account of concern over delays in power capacity addition. However, things are likely to change for the better. In the current financial year alone, it aims to add 5,000 Mw of generation capacity, almost equal to the capacity added in the past three years and double the addition in 2010-11. Notably, the company has an equally strong pipeline of projects thereafter. Coupled with expected improvement in plant utilisation (plant load factor or PLF), this should translate into better earnings growth and return on equity (RoE) over the next two years.

The stock is currently trading at historically low P/BV and PE valuations, based on 2012-13 estimates. Given that earnings are expected to grow at about 20 per cent yearly and RoE to improve over the next two years, the stock looks attractive. While there are concerns in terms of fuel security, low valuations would provide support if the company were to slip a bit on its targets. "The stock is trading at good valuations, also a reason that we do not see much downside from here," says Rabindra Nath Nayak, senior analyst at SBI Cap Securities. Meanwhile, analysts value the stock at `220-230, indicating 24-30 per cent upside from current levels of `178.

The company is very likely to miss its capacity addition target by a big margin for the ongoing 11th Five-Year Plan ending March 2012. Thanks to the delays, many of NTPC's projects, equivalent to about 14,700 mw, are currently under construction. Of these, a large part will be operational over the next three years, including 5,000 Mw in the current year.

This is good news, which analysts believe will drive earnings growth. For instance, over the next two years, analysts are expecting the company to report earnings growth of over 20 per cent yearly, as against the six per cent decline seen in 2010-11. If the plan of adding 5,000 Mw of new capacity every year in the 12th Plan materialises, expect earnings growth to remain healthy.

FUEL A CONCERN

While analysts are confident about the capacity addition plans in the next two to three years, the ability to secure fuel for the upcoming new capacities is under test. "With the new capacities, the company will require about 172 million tonnes of coal next year as against the 150 mt currently. We do not see much of a fuel problem in the current year but next year, the company might have to depend on imports," says Nayak. Domestic availability of coal is low. The good news is that China's economic growth is slowing. This should not only moderate pressure on international prices of coal (anyway passed on by NPTC to its customers) but also reduce pressure on coal availability.

The other challenge is availability of gas. NTPC has about 4,000 Mw of gas-based power generation capacity, which require about 16 million standard cubic metres per day of gas. However, due to shortage of fuel, these power plants have operated at a relatively lower PLF of 67-70 per cent, a trend that may not change soon. Due to non-availability of gas, analysts expect a delay in two of NTPC's new gasbased power plants (Kawas and Gandhar, totalling 2,600 Mw). The company has applied for gas allocation, which if approved will improve plant utilisation and lead to higher generation.

While concern over fuel security exists and may ease only in the medium term, investors also need to keep an eye on how the company resolves the issue relating to the backing down of power by state electricity boards (SEBs). Since many SEBs are financially weak, they have been resorting to load shedding (due to their inability to pay), even as demand has remained intact.

Last year, there was backing down of about 13 billion units, equivalent to four to five per cent of NTPC's annual generation. As the problem remains, there could be some impact on NTPC's overall generation and the PLF in the nearto-medium term.