INITIATING COVERAGE NTPC Ltd - …reports.choiceindia.com/Reports/FUR230720150414181.pdf · 52 week H/L (Rs.) (PLF) Particulars through Forecast Projections years Valuation NTPC Ltd

NTPC Ltd. Electric Utilities

INITIATING COVERAGE

BUY

Relative Capital Market Strength

NTPC Ltd. (NTPC) is a state owned enterprise with “Maharatna” status, incorporated in 1975 for the development of power sector in India. Since then the company has emerged as the dominant player in the power sector having presence across the power generation value chain.

Most efficient and Market Leader in the Power Generation Space: As on 31st Mar. 2015, NTPC group had a market share of 16.3% (in terms of installed capacity). During FY15, the company generated 241.2bn units as against all India power generation of 1,048.4bn, translating into a market share of 23%. Moreover, despite fuel security concerns for the sector, NTPC’s plant has consistently operated at higher utilization levels as compared to the sector. During FY15, the company’s coal plant operated at higher plant load factor (PLF) of 80.2% as compared to all India thermal PLF of 64.5%. In Q1 FY16, NTPC’s coal plant operated at a PLF of 80.4% v/s all India thermal PLF of 69.7%.

Stable Business Model: NTPC operates under a regulated business model, earning 15.5% return on equity (RoE) on its investments. The company has almost tied up the entire output from the power plant with its customers through a power purchase agreement (PPA) with a price escalation clause. Pursuant to this, NTPC is able to pass on the increased cost of power production to its customer.

Forecast a Capacity Addition of 4.5GW over FY16-17: We are expecting a capacity addition of 2,403MW and 1,850MW in FY16E and FY17E, respectively. During the same period, NTPC is expected to commercialize 45,501MW and 47,851MW, respectively. Residual capacity of 4,830MW of 12th five year plan is likely to slip for next five year plan i.e. 13th five year plan. The company has also planned a capacity addition for 12,321MW for 13th five year plan.

Not Impacted by the poor financial position of SEBs: As per the tariff determination guidelines by the sector regulator Central Electricity Regulatory Commission (CERC) for the period FY15-19, NTPC’s power plants are entitled for performance incentive if operated on a PLF level above 85%. Moreover, the power plants can claim fixed cost recovery, if the plant availability factor (PAF) is 83% and above. NTPC is able to recover full fixed cost as its plant operated at PAF level above 83% levels. With the revival in the economic activities, we expect PLF level to increase gradually to 82% levels in FY17E

Improved visibility of fuel security for coal based power plants: NTPC has entered into a fuel supply agreement (FSA) with Coal India Ltd. (CIL) and The Singareni Collieries Company Ltd. (SCCL) for the supply of coal for period of 20 years for the power plants installed prior to FY09. Moreover, the company has signed new FSAs for the power plants with a capacity of 9,600MW installed between FY10-FY15. In FY15, NTPC has been allotted nine captive coal blocks with reserves of over 5.7bn tonnes, which are in different stages of development and are anticipated to start production by FY17 end.

Valuation: NTPC has a regulated business model with high certainty in cash flow generation. Moreover, the company is in better financial position to fund its future capacity expansion. At CMP of Rs. 137.2, NTPC is trading at a P/E multiple of 13.5x and 9.7x to its FY16E and FY17E earnings, respectively, which we feel is inexpensive taking into consideration its project addition schedule, profitability and RoE of 10-13%. Based on a P/E multiple of 12x to its FY17E earnings, we arrive at a target price of Rs. 169 per share, reflecting a return of 23%. Thus we recommend a “BUY” rating on the stock.

Rajnath Yadav | Board line: +91 22 6707 9999; Ext. 975 | [email protected]

1 © CHOICE INSTITUTIONAL RESEARCH

July 23, 2015

Rating Matrix

CMP (Rs.) 137

Rating Buy

Target price (Rs.) 169

Target period 12 months

Upside potential 23%

52 week H/L (Rs.) 164.7 / 126.8

Face value (Rs.) 10

Category Large Cap

Sector Electric Utilities

Shareholding Pattern as on 30th June 2015

Particulars Jun-15 Mar-15 Sep-14 Jun-14

Promoters 75.0% 75.0% 75.0% 75.0%

FIIs 10.0% 10.3% 10.4% 10.4%

DIIs 12.7% 12.3% 12.1% 11.8%

Non institutions 2.3% 2.4% 2.5% 2.8%

Financial Snapshot (Rs. bn)

Projections FY12 FY13 FY14 FY15 FY16E FY17E

Revenue 621 657 720 732 724 854

EBITDA 140 171 178 161 168 213

Adjusted PAT 92 109 110 103 84 116

EBITDA (%) 22.6% 26.0% 24.7% 22.0% 23.3% 25.0%

PAT (%) 14.9% 16.6% 15.2% 14.0% 11.5% 13.6%

EPS 11 13 13 12 10 14

BVPS 89 97 104 99 107 118

RONW (%) 13.1% 14.2% 13.2% 12.3% 9.9% 12.6%

P/E 13.5 9.7

P / BVPS 1.3 1.2

80859095

100105110115

NTPC Ltd. Sensex

INITIATING COVERAGE


Company Introduction:

NTPC Ltd. (National Thermal Power Corporation Ltd.) is a state owned enterprise with “Maharatna” status, incorporated in 1975 for the development of power sector in India. Over the period, the company has emerged as the dominant player in the power sector having presence across the power generation value chain through backward and forward integration. Apart from thermal power generation, NTPC has presence in the power generation via hydro, nuclear & renewable energy sources, coal mining, power equipment manufacturing, power trading and distribution. As of 20th July, 2015, on a group level, NTPC had an installed power generation capacity of 45,048MW and total commercial capacity of 43,943MW. Group level installed and commercial power generation capacity includes capacities from various joint ventures.

Source: Choice Broking Research Source: Choice Broking Research

BUY

July 23, 2015

Installed power generation capacity (MW) as on 20th July 2015

Commercialized Power Generation Capacity (MW) as on 20th July 2015

35,882 37,127

38,202 38,852

41,273

43,108 44,398

45,048

35,000

37,000

39,000

41,000

43,000

45,000

47,000

FY13 FY14 FY15 FY16 (YTD)

Installed Capacity (NTPC - Standalone, MW)

Installed Capacity (NTPC - Group, MW)

34,882

36,447 37,142

37,942

39,273

41,948 43,143

43,943

33,000

35,000

37,000

39,000

41,000

43,000

45,000

FY13 FY14 FY15 FY16 (YTD)

Commercialized Capacity (NTPC - Standalone, MW)

Commercialized Capacity (NTPC - Group, MW)

Diversified Fuel Mix: NTPC is primarily into thermal power generation with coal and gas based power plants constituted 84.7% and 13.3%, respectively, to the group level installed capacity. During FY16, the company ventured into hydro power generation with a power generation capacity of 800MW. Additionally, NTPC has 110MW solar power capacity. By 2032, the company is planning to have a power generation capacity of 1,28,000MW. Coal and gas based power plant are likely to expand by 3.8% and 7.5% CAGR over FY15-32, respectively. Over the same period, renewables and hydro power capacities to expand by 31.5% and 16.2%, respectively. As a result, by 2032, around 28% of the NTPC’s installed capacities to be on non-fossil fuels.


Diversified Fuel-mix (as on 20th July 2015) Anticipated fuel-mix in 2032

84.7%

13.3%

1.8% 0.2%

Coal Power Plant Gas Power Plant

Hydro Power Plant Solar Power Plant

56% 16%

11%

9% 8%

Coal Power Plant Gas Power Plant

Nuclear Power Plant Renewable Power Plant


INITIATING COVERAGE


Company Introduction (Contd…)

Revenue Profile: As on FY15 end, the company derives the revenue from two segments, namely, the Generation and the Others. The primary business of the company is generation and sales of power, while, the Others segment includes consultancy services, project management and supervision, oil and gas exploration and coal mining

Revenue Profile (At the end of FY15)

Source: Choice Broking Research


Power Sector Overview: Infrastructure is one of the key drivers of the Indian Economy and thus it is given a high priority during the formulation of the policies. Investment in infrastructure is directly correlated to the national GDP, as sectors involved in infrastructure industry are roads, power telecom, railway, ports, airports etc. As Indian economy is anticipated to grow at higher rate, the government is expecting huge investments in these sectors. The government is focusing to provide affordable, 24x7 power to all households by 2019. This has resulted into accelerated capacity addition by the power generators. For 12th five year plant the government has increased the investment in infrastructure to Rs. 51.5tn, representing an increase by 2.6 times as compared to 11th plan. Power sector is the major contributor towards total infrastructure spending, followed by roads, telecommunication and railways sector in 11th plan.

BUY

99.8%

0.2%

Generation Others

Revenue Profile (At the end of FY15)

35.9%

17.9%

17.1%

8.9%

3.1%

1.4% 15.7%

Electricity Roads TelecommunicationsRailways Ports AirportsOthers

July 23, 2015


INITIATING COVERAGE


Sector Overview (Contd…)

Earlier the sector was dominated by few central and state utilities, however, since last decade many private players have ventured and increased their market share and competition. The power developers have large capacity expansion plans for the future. The rate of capacity addition has risen from ~4GW during 1992-2002 to ~9GW during 2002-12. Taking into consideration the governments focus, it is expected that the sector will sustain the capacity addition in 12th and 13th plan.

Below are the key critical requirements for future growth of the sector:

• Improvement in the power transmission network and capacity expansion

• Reduction in the transmission and distribution losses

• Improving the financial health of SEBs

• Enhancing the fuel security

• Fast approvals in the regulatory requirements such as environmental clearance, forest clearance, water availability etc.

• Land availability and ease in land acquisition process

Particular (mn tonnes) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E Coal India 375.3 400.7 415.9 424.3 432.5 465.0 471.5 520.0 SCCL 42.0 44.4 49.4 50.1 51.4 52.1 47.9 55.5 Others 37.1 43.9 49.3 49.6 51.3 50.6 51.6 68.3 Total Domestic Supply 454.4 489.0 514.5 524.1 535.2 567.6 571.0 643.8 Coal Imports 49.8 59.0 83.4 132.2 160.9 145.8 168.5 200.0 Total Domestic Demand 504.2 548.0 597.9 656.3 696.0 713.4 739.5 843.8


FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E Coal Import Bill (USD bn) 6.4 10.0 9.0 9.8 17.4 17.0 16.4 17.7 Coal Import Cost per Tonne (USD) 129.0 169.3 107.4 74.1 108.4 116.7 97.4 88.5 Coal Import Bill (Rs. bn) 258.6 459.5 425.1 446.7 836.0 925.4 992.5 1,082.4 USD/INR Rate 40.3 46.0 47.4 45.6 47.9 54.4 60.5 61.2

National Coal Demand-Supply Position

Coal Import Bill

To address the fuel constraints face by the power developer, the government has recently concluded e-auction of 29 coal mines in two phases. Moreover, the government has enhanced the coal availability in India by addressing the production bottleneck faced by the coal miners in India. The government is aggressively focusing on achieving the coal production target of 1.5bn tonnes by 2020.

The government has planned a power capacity addition of 75.7GW in 12th five year plan over FY13-17. Major part of the expansion is expected to come from 62.6GW addition of coal based thermal power plant. By FY17, India’s national coal demand is expected to touch to around 980mn tonnes, of which demand from power sector is expected to be around 700mn tonnes. With indigenous coal availability projected at around 800mn tonnes, the power companies will continue to depend on the imports.

The coal ministry is undertaking certain steps such as expediting contract mining, faster regulatory clearance & land acquisition, improving infrastructure at coalfields, modernization of mines etc. to reduce the coal import by increase the coal production coupled with the expansion in the evacuation capacity.

BUY


July 23, 2015

Coal Demand Supply Equation in India: At the end of 11th five year plan, coal based power plant formed 56.5% of the national power generation capacity. To meet the supply-demand mismatch, power companies have resorted to coal import in the past. Below is the national coal demand-supply position in India.


INITIATING COVERAGE


Investment Rationale:

1) Most efficient and Market Leader in the Power Generation Space: As on 31st Mar. 2015, NTPC group had an installed capacity of 44,398MW as against an all India installed capacity of 271,722MW, translating into a market share of 16.3%. Moreover, the company had a market share of 23.2% in the all India thermal capacity. On power generation front, NTPC is far more efficient in the sector. Despite having lower share in the all India installed capacity, the company generated 241.2bn units as against all India power generation of 1,048.4bn, translating into a market share of 23%.


Installed Capacity Market Share by the End of FY15 NTPC's Share in All India Power Generation


2) Stable Business Model: NTPC operates under a regulated business model, earning 15.5% RoE on its investments. The company has almost tied up the entire output from the power plant with its customers through a PPA with a price escalation clause. Pursuant to this, NTPC is able to pass on the increased cost of power production to its customer.


BUY

83.7%

16.3%

Others Players NTPC

77.0%

23.0%

Others Players NTPC

Its highly efficient power plant operations have mainly led to such distinction and dominance in the Indian power sector. Despite fuel security concerns for the sector, NTPC’s plant has consistently operated at higher utilization levels as compared to the sector. During FY15, the company’s coal plant operated at higher PLF of 80.2% as compared to all India thermal PLF of 64.5%. In Q1 FY16, NTPC’s coal plant operated at a PLF of 80.4% v/s all India thermal PLF of 69.7%.

Power Tariff and Fuel Cost (Rs.)

2.98

3.30 3.28 3.30 3.43

1.90

2.11 2.17 2.18 2.22

1.5

2.0

2.5

3.0

3.5

FY13 FY14 FY15 FY16E FY17E

Average Tariff (Rs. per Unit) Average Fuel Cost (Rs. per Unit)

July 23, 2015


INITIATING COVERAGE


Investment Rationale (Contd…)

The company normally finances its power projects on 70:30 debt equity ratio. As on FY15 end, NTPC had a standalone regulated equity of Rs. 369,162.7mn, which is expected to increase by 9.9% CAGR over FY15-17E to Rs. 445,683.1mn. RoE for FY16E is expected to decline as compared to FY15 on account of back down by the state electricity board (SEBs) for the offtake of power. However, with anticipated rebound in economic activity in H2 FY16, NTPC is likely to post an increase in the RoE.


Capacity Addition and Commercialization Schedule Group Installed and Commercial Capacity (MW)

BUY


Regulated Equity (Rs. mn) and Core RoE (%)

272,000

325,756

351,392 369,163

401,799

445,683 24.5%

26.0%

16.5%

20.1%

14.3%

18.7%

10%

15%

20%

25%

30%

250,000

300,000

350,000

400,000

450,000

500,000

FY12 FY13 FY14 FY15 FY16E FY17E

Regulated Equity (Rs. mn) Core RoE (%)

3. Forecast a Capacity Addition of 4.5GW over FY16-17: After taking into consideration the developments across each projects, we are expecting a capacity addition of 2,403MW and 1,850MW in FY16E and FY17E, respectively, as against NTPC’s target of 2,255MW and 4,170MW during the same period. The company is likely to have an installed capacity of 46,801MW and 48,651MW by the end of FY16E and FY17E. During the same period, NTPC is expected to commercialize 45,501MW and 47,851MW, respectively.

2,403

1,850

2,358 2,350

1,500

1,700

1,900

2,100

2,300

2,500

FY16E FY17ECommissioning of Power Capacity (MW)

Commercialization of Power Capacity (MW)

41,273

43,108 44,398

46,801 48,651

39,273

41,948 43,143

45,501 47,851

35,000

40,000

45,000

50,000


Group Installed Capacity (MW)

Group Commercial Capacity (MW)

Residual capacity of 4,830MW of 12th five year plan is likely to slip for next five year plan i.e. 13th five year plan. Additionally, the company has planned a capacity addition for 12,321MW for 13th five year plan.

July 23, 2015


INITIATING COVERAGE



4. Not Impacted by the poor financial position of SEBs: As per the tariff determination guidelines by the sector regulator CERC for the period FY15-19, NTPC’s power plants are entitled for performance incentive if operated on a PLF level above 85%. Moreover, the power plants can claim fixed cost recovery, if the plant availability factor (PAF) is 83% and above.

Since the last couple of years, despite significant power demand, SEBs are not purchasing costly power, mainly due to their poor financial position. As a result, the company was not able to maintain the required PLF level, which has resulted into lower incentive income. However, NTPC is able to recover full fixed cost as its plant operated at PAF level above 83% levels. With the revival in the economic activities, we expect PLF level to increase gradually to 82% levels in FY17E.

BUY

Sr. No. Project Name Capacity

(MW)

Residual Capacity

(MW) Technology

Land Acquisition

Water Fuel Forest

Clearance Environment

Clearance Financial Closure

Expected Date of Commissioning

Standalone Coal Based Power Projects

1 Bongaigaon, Assam (3 X 250) 750 500 Sub Critical √ √ √ √ √ √ FY16, FY17

2 Barh-I, Bihar (3 X 660) 1,980 1,980 Super Critical √ √ √ √ √ √ FY16, FY17

3 Barh-II, Unit V, Bihar (1 X 660) 660 660 Super Critical √ √ √ √ √ √ FY17

4 Lara-I, Chattisgarh (2 X 800) 1,600 1,600 Super Critical √ √ √ √ √ √ Beyond FY17

5 North Karanpura, Jharkhand (3 X 660) 1,980 1,980 Super Critical √ √ √ √ √ √ Beyond FY17

6 Kudgi - I, Karnataka (3 X 800) 2,400 2,400 Super Critical √ √ √ √ √ √ FY16, FY17 and FY18

7 Gadarwara-I, Madhya Pradesh (2 X 800) 1,600 1,600 Super Critical √ √ √ √ √ √ Beyond FY17

8 Vindhyachal - V, Madhya Pradesh (1 X 500) 500 500 Sub Critical √ √ √ √ √ √ FY16

9 Mouda-II, Maharashtra 1,320 1,320 Super Critical √ √ √ √ √ √ FY17

10 Solapur, Maharashtra (2 X 660) 1,320 1,320 Super Critical √ √ √ √ √ √ FY17

11 Darlipalli, Odisha (2 X 800) 1,600 1,600 Super Critical √ √ √ √ √ √ Beyond FY17

12 Unchahar, Uttar Pradesh 500 500 √ √ √ √ √ √ Beyond FY17

Total 16,210 15,960

Hydro Electric Power Projects

1 Tapovan Vishnugad, Uttarakhand 520 520 √ √ √ √ √ √ Beyond FY17

2 Lata Tapovan, Uttarakhand 171 171 √ √ √ √ √ √ Beyond FY17

3 Singrauli CW Discharge (Hydro), Uttar Pradesh 8 8 √ √ √ √ √ √ FY16

Total 699 699

Solar Energy Power Projects

1 Anantpur Solar PV, Andhra Pradesh (5 X 50) 250 250 √ √ √ √ √ √ FY17

Total 250 250

Coal Based Projects under JVs & Subsidiaries

1 Nabinagar- JV with Railways, Bihar (4 X 250) 1,000 1,000 Sub Critical √ √ √ √ √ √ FY16, FY17 and FY18

2 Muzaffarpur Expansion (MTPS) – JV with BSPGCL,

Bihar (2 X 195) 390 195 Sub Critical √ √ √ √ √ √ FY16

3 Nabinagar, JV with BSPGCL, Bihar 1,980 1,980 Super Critical √ √ √ √ √ √ Beyond FY17

4 Meja, JV with UPRVUNL, Uttar Pradesh (2 X 660) 1,320 1,320 Super Critical √ √ √ √ √ √ Beyond FY17

Total 4,690 4,495

Total On-Going Projects 21,849 21,404


Status of Future Coal Mining Projects

July 23, 2015


INITIATING COVERAGE



5. Improved visibility of fuel security for coal based power plants: NTPC has entered into a fuel supply agreement (FSA) with CIL and SCCL for the supply of coal for period of 20 years for the power plants installed prior to FY09. Annual contracted quantity (ACQ) for these power plants is estimated to be around 125mn tonnes, equivalent to 90% of the total requirement. Moreover, the company has signed new FSAs for the power plants with a capacity of 9,600MW installed between FY10-FY15. As per new FSAs, NTPC is entitled for ACQ of around 40mn tonnes, equivalent to 80% of the PLF. To meet the residual requirement the company frequently imports coal. Additionally, NTPC has been allotted nine captive coal blocks with reserves of over 5.7bn tonnes and annual production potential of 100mn tonnes. These coal blocks are at different stages of development and are anticipated to start production by FY17 end.

BUY


NTPC Coal PLF and PAF (%)

85.0%

83.1% 81.5%

80.2%

76.5%

82.0%

89.5% 87.6%

91.8%

88.6% 89.4% 89.3%

75%

81%

87%

93%


Coal PLF (%) Coal PAF (%)

Sr. No. Project Name Reserves (mn tonnes) Mining Capacity per Year

(mn tonnes) Mining Plan Approval Land Acquisition

Environmental Clearance

Forest Clearance Appointment of MDO

1 Pakri-Barwadih 1,436 15 √ √ √ √ In Process

2 Chatti-Bariatu 548 7 √ √ √ √ Completed

3 Kerandari 285 6 √ √ √ √ In Process

4 Talaipalli 1,267 18 √ √ √ √ In Process

5 Dulanga 196 7 √ √ √ √ In Process

6 Banai 629 13 x x x x Under Development

7 Bhalumuda 550 11 x x x x Under Development

8 Chandrabila 550 11 x x x x Under Development

9 Kudanali-Luburi 266 5 x x x x Under Development

Total 5,727 93

Status of Future Coal Mining Projects

July 23, 2015


INITIATING COVERAGE


Quarterly and Financial Performance:

Recent Quarter Analysis: Despite adding 1,195MW of the commercial generation capacity in Q4 FY15 over same quarter last year, NTPC reported 2.1% drop in gross generation, which was due lower demand from SEBs. Despite having robust demand, SEBs was not in a position to take power from the grid, mainly due to their poor financial position. This has led to lower utilization of coal based power plants with NTPC reporting almost 6ppt decline in PLF level to 82.7%, however this was far above the national coal PLF of 62.6%. Energy sales volume stood at 57,385mn units, representing a decline of 1.7% Y-o-Y, this coupled with 2.9% Y-o-Y fall in average tariff, standalone top-line declined by 8.2% Y-o-Y to Rs. 193,145.8mn. On the back of 13.3% Y-o-y decline in fuel cost, the company reported 11% Y-o-Y fall in total operating expenditure. Accordingly, EBITDA increased by 2.1% Y-o-Y to Rs. 46,490.9mn, with a 242bps expansion in EBITDA margin. High generation capacity resulted to higher depreciation (up 15.2%) and interest charge (up 24.6%). Effective tax incidence declined by 240bps to 5.7%. Consequently, reported net profit 4.8% Y-o-Y to Rs. 29,440.3mn. Net Profit margin expanded by 54bps Y-o-Y to 15.2%

BUY


Quarterly Financial Performance Quarterly Operational Performance

210,388.3

183,367.5

167,366.3

188,580.9

193,145.8 21.7%

19.3% 19.4%

24.7% 24.1%

14.7%

12.0%

12.4%

16.3% 15.2%

10%

12%

14%

16%

18%

20%

22%

24%

150,000

160,000

170,000

180,000

190,000

200,000

210,000

220,000

Q4 FY14 Q1 FY15 Q2 FY15 Q3 FY15 Q4 FY15

Total Operating Income EBITDA Margin (%)

PAT Margin (%)

43,108

43,128 43,128 43,143

44,398

41,948 41,968 41,968

42,643 43,143

88.7%

84.3%

73.2%

80.8% 82.7%

99.8%

89.3%

76.8%

91.0%

97.2%

70%

80%

90%

100%

41,000

42,000

43,000

44,000

45,000

Q4 FY14 Q1 FY15 Q2 FY15 Q3 FY15 Q4 FY15

Group Installed Capacity (MW)Group Commercial Capacity (MW)Coal PLF (%)Coal PAF (%)

Recent Annual Result Analysis: For full fiscal FY15, NTPC reported 1.7% increase in top-line to Rs. 732,460.5mn, driven by 3.4% increase in power sales volume to 224,918mn units. However, average tariff declined by 0.6% to Rs. 3.28 per unit. Higher sales volume was due to 1,195MW addition in commercialized capacity. NTPC installed capacity increased by 1,290MW to 44,398MW. NTPC coal PLF declined by 130bps to 80.2%, which was better as compared to all India Coal PLF level of 64.5%. Total operating expenditure increased by 5.4%, mainly due to higher fuel cost. Standalone EBITDA declined by 9.6% to Rs. 160,856mn, with 274bps contraction in EBITDA margin as compared to FY14. Higher capacity led to increase in depreciation (up 18.6%) and interest charge (up 14%). However due to lower effective tax rate, the company reported 6.2% fall in net profit with 119bps contraction in net profit margin.

July 23, 2015


INITIATING COVERAGE


Quarterly and Financial Performance (Contd…)

BUY


Annual Financial Performance Annual Operational Performance

620,522.3

656,916.0

720,192.6 732,460.5

724,139.8

853,692.0

22.6%

26.0% 24.7%

22.0% 23.3% 25.0%

14.9%

16.6%

15.2% 14.0%

11.5% 13.6%

10%

20%

30%

600,000

700,000

800,000

900,000


Total Operating Income EBITDA Margin (%)

PAT Margin (%)

3.0

3.3 3.3 3.3 3.4

1.9 2.1

2.2 2.2 2.2

83.1% 81.5%

80.2%

76.5%

81.3%

87.6% 91.8%

88.6% 87.5% 87.5%

70%

80%

90%

100%

2

2

3

3

4


Average Tariff (Rs. per Unit)Average Fuel Cost (Rs. per Unit)NTPC Coal PLF (%)NTPC Coal PAF (%)

Expectations for FY16E and FY17E: For FY16Eand FY17E, we expect NTPC to commercialize 2,358MW and 2,350MW of the generation capacity. However we anticipate continued back down by the SEBs in FY16E, thereby leading to lower demand of electricity for the company. For FY16E, coal PLF is likely to decline to 76.5% as compared to FY15, but with the anticipated revival in economic activity in H2 FY16E, coal PLF is expected to increase in FY17 to 81.3%. Electricity sales volume is likely to be at 233.6bn and 265.1bn units in FY16E and FY17E, respectively. Average realization to increase by 2.3% CAGR over FY15-17E, while average fuel cost to increase by 1.1% CAGR during the same period. As a result, standalone total operating income to decline by 1.1% in FY16E and increase by 17.9% in FY17E. EBITDA to increase by 4.7% in FY16E to Rs. 168,491.3mn and 26.7% in FY17E to Rs. 213,442.5mn. During the same period, EBITDA margin to expand by 115bps and 123bps, respectively, mainly due to lower fuel cost. Depreciation and finance charge to increase due to increase in generation capacity. In FY16E, reported PAT is expected to decline by 18.7% Y-o-Y to Rs. 83,632.2mn, mainly due to higher effective tax rate of 20% as compared to 2.4% in FY15. Reported PAT for FY17E to increase by 13.6% to Rs. 116,407.8mn as compared to FY15.

Risk and Concerns: 1. Disinvestment overhang to put pressure on the stock price: The Union Cabinet approved proposals to divest its 5%

stake in NTPC, which may fetch the government over Rs. 55,712.5mn at current market price. Current stake of government in the company is 74.96%, however post divestment, the government holding will come down to 69.96%. Thus, we anticipate temporary pressure on the stock price.

2. Insufficient fuel availability: NTPC meets majority of the coal requirement from CIL and SCCL. Currently, due to poor power demand, CIL and SCCL are able to meet the requirements. Any deficit is met by coal import. However, with the revival in economic activities, the demand of power and coal is likely to increase. If CIL and SCCL are not able to meet the demands, then power generators have to rely on imported coal which is not cost effective. Thus lower fuel availability will be negative for the company.

3. Continued distressed financial position of SEBs: NTPC supplies most cost effective power to its customers as compared to other players in the industry. SEBs with its poor financial health are not able to take power from the grid, which to some extent has impacted the performance of the company. Without any improvement in the position, SEBs may continue to back down the power from the grid, which may be negative for NTPC.

4. Delay in Land Acquisition and Regulatory Clearance: NTPC has around 12GW of the capacity where land acquisition and other regulatory clearance like environmental, forest and water are not available. Difficulty in getting the approvals and delay in land acquisition will impact the project execution pace of the company.

July 23, 2015


INITIATING COVERAGE


Peer Group Valuation

Above stated peers are the major players in the power sector in India and they operate in the regulatory framework. Power Grid Corporation of India Ltd. (PGCIL) is the market leader in the transmission space in India. NTPC is the only company among the above mentioned peers, which is has PPA for 100% of the power generated. Whereas other players have assess to merchant power business, where revenue generation is volatile. We feel that, NTPC being a market leader in power generation space operating under regulated business model with high revenue visibility, is under valued as compared to its peers. Moreover, we expect, the company has enough potential to grow taking into consideration its project inventory, financial position and cash flow generation ability.




Valuation:

Based on the below conservative operating assumption, we estimate NTPC’s total operating income to grow at 7.2% CAGR over FY15-17 to Rs. 840,994.7mn, while PAT to grow at 6.4% CAGR over the same period to Rs. 116,407.8mn. At CMP of Rs. 137.2, the company’s share is trading at TTM P/E multiple of 11x. Additionally, the company is trading at P/BVPS and EV/EBITDA multiple of 1.4x and 11.1x, respectively. Based on P/E valuation, we value NTPC with at a target price of Rs. 169 per share, reflecting a return of 23%. Thus we recommend a “BUY” rating on the stock.

BUY

Companies CMP (Rs.)

MCAP (Rs.mn)

Stock Return (%) LTM Revenue (Rs. mn)

LTM EBIDTA Margin (%)

LTM PAT Margin (%) 1M 3M 6M 12M

NTPC Ltd. 137 1,131,431 -0.7% -10.9% -6.0% -8.9% 732,460.5 22.0% 14.0% Adani Power Ltd. 29 84,259 2.0% -37.7% -39.0% -53.4% 195,449.4 29.0% -4.2% Tata Power Co., Ltd. 73 197,167 0.0% -6.9% -13.3% -30.6% 343,668.5 20.2% 1.2% JSW Energy Ltd. 99 162,201 -1.8% -14.6% -12.1% 23.7% 93,801.6 38.6% 14.7% Power Grid Corporation of India Ltd. 142 744,978 -0.6% -6.3% -5.0% 2.3% 176,585.1 85.4% 28.6%

Companies FV (Rs.) EPS (Rs.) BVPS (Rs.)

DPS (Rs.)

Debt Equity Ratio

RoE (%) P / E (x)

P / B (x)

EV / EBITDA

(x) NTPC Ltd. 10 12.5 99.0 2.9 1.0 12.6% 11.0 1.4 11.1 Adani Power Ltd. 10 -2.8 19.5 0.0 7.2 -14.2% -10.3 1.5 8.6 Tata Power Co., Ltd. 1 1.5 62.2 1.5 2.3 2.4% 48.2 1.2 8.2 JSW Energy Ltd. 10 8.4 46.2 2.3 1.1 18.2% 11.8 2.1 6.6 Power Grid Corporation of India Ltd. 10 9.6 73.5 2.3 2.5 13.1% 14.8 1.9 11.1

July 23, 2015

Financial Assumptions FY16E FY17E

Capacity Addition (MW) 2,403 1,850 Group Installed Capacity (MW) 46,801 48,651 Commercial Capacity Addition (MW) 2,358 2,350 Commercial Capacity (MW) 45,501 47,851 Regulated Equity (Rs. mn) 401,799 445,683 Coal PLF (%) 77% 81% Gas PLF (%) 31% 35% Power Generation (mn units) 233,588 265,099 Power Sales Volume (mn units) 217,669 247,147 Coal Consumption (mn tonnes) 177 199 Gas Consumption (mmbtu) 87 99 Average Realization per Unit (Rs.) 3.3 3.4 Average Fuel Cost per Unit (Rs.) 2.2 2.2 Tax Rate (%) 20% 17%


INITIATING COVERAGE


Valuation Bands

BUY

July 23, 2015

P/E Band: Stock is available at P/E, which is 17.7% discount to average P/E


8.5

13.4

19.2

5

10

15

20

Ap

r-1

0Ju

n-1

0A

ug-

10

Oct

-10

Dec

-10

Feb

-11

Ap

r-1

1Ju

n-1

1A

ug-

11

Oct

-11

Dec

-11

Feb

-12

Ap

r-1

2Ju

n-1

2A

ug-

12

Oct

-12

Dec

-12

Feb

-13

Ap

r-1

3Ju

n-1

3A

ug-

13

Oct

-13

Dec

-13

Feb

-14

Ap

r-1

4Ju

n-1

4A

ug-

14

Oct

-14

Dec

-14

Feb

-15

Current P/e Lower P/E RangeAverage P/E Range Higher P/E Range

70

100

130

160

190

220

250

Ap

r-1

0Ju

n-1

0A

ug-

10

Oct

-10

Dec

-10

Feb

-11

Ap

r-1

1Ju

n-1

1A

ug-

11

Oct

-11

Dec

-11

Feb

-12

Ap

r-1

2Ju

n-1

2A

ug-

12

Oct

-12

Dec

-12

Feb

-13

Ap

r-1

3Ju

n-1

3A

ug-

13

Oct

-13

Dec

-13

Feb

-14

Ap

r-1

4Ju

n-1

4A

ug-

14

Oct

-14

Dec

-14

Feb

-15

Share Price P/E 8x P/E 10x

P/E 12x P/E 14x P/E 18x

P/BVPS Band: Current P/BVPS is at 23% discount to average P/BVPS

1.09

1.80

2.78

1.0

1.5

2.0

2.5

3.0

Ap

r-1

0Ju

n-1

0A

ug-

10

Oct

-10

Dec

-10

Feb

-11

Ap

r-1

1Ju

n-1

1A

ug-

11

Oct

-11

Dec

-11

Feb

-12

Ap

r-1

2Ju

n-1

2A

ug-

12

Oct

-12

Dec

-12

Feb

-13

Ap

r-1

3Ju

n-1

3A

ug-

13

Oct

-13

Dec

-13

Feb

-14

Ap

r-1

4Ju

n-1

4A

ug-

14

Oct

-14

Dec

-14

Feb

-15

Current P/BVPS Lower P/BVPS

Average P/BVPS Higher P/BVPS

0

50

100

150

200

250

300

Ap

r-1

0Ju

n-1

0A

ug-

10

Oct

-10

Dec

-10

Feb

-11

Ap

r-1

1Ju

n-1

1A

ug-

11

Oct

-11

Dec

-11

Feb

-12

Ap

r-1

2Ju

n-1

2A

ug-

12

Oct

-12

Dec

-12

Feb

-13

Ap

r-1

3Ju

n-1

3A

ug-

13

Oct

-13

Dec

-13

Feb

-14

Ap

r-1

4Ju

n-1

4A

ug-

14

Oct

-14

Dec

-14

Feb

-15

Share Price P/BVPS 1x P/BVPS 1.5x

P/BVPS 2x P/BVPS 2.5x


EV/EBITDA Band: Current EV/EBITDA is at 8.2% discount to average EV/EBITDA


8.7

12.1

15.9

8

10

12

14

16

Ap

r-1

0Ju

n-1

0A

ug-

10

Oct

-10

Dec

-10

Feb

-11

Ap

r-1

1Ju

n-1

1A

ug-

11

Oct

-11

Dec

-11

Feb

-12

Ap

r-1

2Ju

n-1

2A

ug-

12

Oct

-12

Dec

-12

Feb

-13

Ap

r-1

3Ju

n-1

3A

ug-

13

Oct

-13

Dec

-13

Feb

-14

Ap

r-1

4Ju

n-1

4A

ug-

14

Oct

-14

Dec

-14

Feb

-15

Current EV/EBITDA Lower EV/EBITDA

Average EV/EBITDA Higher EV/EBITDA

1,000,000

1,500,000

2,000,000

2,500,000

Ap

r-1

0Ju

n-1

0A

ug-

10

Oct

-10

Dec

-10

Feb

-11

Ap

r-1

1Ju

n-1

1A

ug-

11

Oct

-11

Dec

-11

Feb

-12

Ap

r-1

2Ju

n-1

2A

ug-

12

Oct

-12

Dec

-12

Feb

-13

Ap

r-1

3Ju

n-1

3A

ug-

13

Oct

-13

Dec

-13

Feb

-14

Ap

r-1

4Ju

n-1

4A

ug-

14

Oct

-14

Dec

-14

Feb

-15

EV EV/EBITDA 8x EV/EBITDA 10x

EV/EBITDA 12x EV/EBITDA 14x


INITIATING COVERAGE


Consolidated Financial Statement



BUY

Profit and Loss Statement Projections (Rs. mn) FY12 FY13 FY14 FY15 FY16E FY17E Total Operating Income 620,522 656,916 720,193 732,461 724,140 853,692 Revenue Growth Rate (%) 9.0% 5.9% 9.6% 1.7% -1.1% 17.9% Total Expenditure (480,124) (485,947) (542,275) (571,605) (555,649) (640,249) EBITDA 140,399 170,969 177,918 160,856 168,491 213,442 EBITDA Growth Rate (%) 2.9% 21.8% 4.1% -9.6% 4.7% 26.7% EBITDA Margin (%) 22.6% 26.0% 24.7% 22.0% 23.3% 25.0% Depreciation (27,917) (33,968) (41,422) (49,117) (54,417) (61,787) EBIT 112,482 137,001 136,496 111,740 114,074 151,656 Interest (17,116) (19,244) (24,066) (27,436) (29,432) (32,547) Other Income 27,897 31,188 26,620 21,163 19,783 20,360 Exceptional Item 0 16,841 0 0 0 0 PBT 123,262 165,786 139,050 105,467 104,426 139,469 Income Tax Expenses (31,024) (39,592) (29,299) (2,558) (20,794) (23,061) PAT 92,237 126,194 109,751 102,909 83,632 116,408 PAT Growth Rate (%) 1.3% 18.6% 0.4% -6.2% -18.7% 39.2% PAT Margin (%) 14.9% 16.6% 15.2% 14.0% 11.5% 13.6%

Balance Sheet Projections (Rs. mn) FY12 FY13 FY14 FY15 FY16E FY17E Share Capital 82,455 82,455 82,455 82,455 82,455 82,455 Reserves And Surplus 650,457 721,421 775,699 734,119 798,516 888,150 Deferred Revenue 14,301 12,441 16,099 13,942 13,942 13,942 Long-Term Borrowings 459,083 532,537 624,058 785,323 824,420 874,018 Deferred Tax Liabilities (Net) 6,369 9,153 10,516 9,791 8,098 9,547 Other Long-Term Liabilities 17,291 19,698 25,125 28,866 28,866 28,866 Long-Term Provisions 6,037 7,399 8,794 11,157 8,444 9,955 Short-Term Borrowings 0 0 0 0 140,639 165,800 Trade Payables 44,607 51,324 64,296 59,532 37,869 44,385 Other Current Liabilities 95,372 104,693 115,476 168,076 121,543 143,287 Short-Term Provisions 32,337 70,045 73,026 77,588 75,782 89,340 Total Liabilities 1,408,307 1,611,165 1,795,542 1,970,847 2,140,573 2,349,743 Tangilble Assets 450,445 626,874 718,659 742,393 991,889 1,221,068 Intangible Assets 2,119 2,487 2,450 46,097 0 0 CWIP 418,278 371,094 448,867 564,935 488,155 410,611 Intangible Assets Under Development 0 0 19 0 0 0 Non-Current Investments 95,839 91,376 81,209 71,541 71,541 71,541 Long Term Loans And Advances 53,944 96,334 127,773 155,279 155,279 155,279 Other Non Current Assets 13,719 14,912 17,868 16,968 16,968 16,968 Current Investments 16,225 16,225 16,370 18,781 18,781 18,781 Inventories 37,029 40,572 53,734 74,530 69,438 77,183 Trade Receivables 58,325 53,650 52,201 76,044 77,374 86,539 Cash And Bank Balances 161,418 168,677 153,114 128,788 140,639 165,800 Short-Term Loans And Advances 15,433 17,456 31,160 24,076 24,076 24,076 Other Current Assets 85,534 111,508 92,120 51,416 86,435 101,898 Total Assets 1,408,307 1,611,165 1,795,542 1,970,847 2,140,573 2,349,743

July 23, 2015


INITIATING COVERAGE


Consolidated Financial Statement (Contd…)



BUY

Cash Flow Statement Projections (Rs. mn) FY12 FY13 FY14 FY15 FY16E FY17E Profit Before Tax 123,262 165,786 139,050 105,467 104,426 139,469 Depreciation and Amortization 27,917 33,968 41,422 49,117 54,417 61,787 Other Adjustments (11,286) (9,875) 5,335 (53,907) 12,869 15,984 Change in Working Capital (22,071) (5,971) (2,919) 52,583 (105,664) 12,405 Income Tax Paid (10,723) (28,956) (25,563) (2,558) (20,794) (23,061) Cash Flow from Operating Activities 107,099 154,952 157,325 150,701 45,254 206,583 CAPEX (107,944) (162,967) (167,397) (228,830) (181,035) (213,423) Change in Investments 18,039 16,225 16,225 7,257 0 0 Others 11,100 6,573 11,375 (1,328) 16,563 16,563 Cash Flow from Investing Activities (78,805) (140,169) (139,797) (222,901) (164,472) (196,860) Net Change in Borrowings 52,135 72,624 73,732 161,266 179,736 74,758 Interest Expenses (38,851) (38,315) (47,414) (27,436) (29,432) (32,547) Dividend & Dividend Tax (41,146) (40,688) (57,881) (23,706) (19,235) (26,774) Others (829) (1,146) (1,527) (62,250) 0 0 Cash Flow from Financing Activities (28,691) (7,524) (33,090) 47,873 131,069 15,438 Net Cash Inflow / Outflow (398) 7,259 (15,562) (24,326) 11,851 25,161 Opening Cash & Cash Equivalents 161,853 161,418 168,677 153,114 128,788 140,639 Closing Cash & Cash Equivalent 161,455 168,677 153,115 128,787 140,639 165,800

Financial Ratios Particulars FY12 FY13 FY14 FY15 FY16E FY17E Profitability & Return Ratios EBITDA Margin (%) 22.6% 26.0% 24.7% 22.0% 23.3% 25.0% PAT Margin (%) 14.9% 16.6% 15.2% 14.0% 11.5% 13.6% RONW (%) 13.1% 14.2% 13.2% 12.3% 9.9% 12.6% RoCE (%) 9.6% 10.5% 9.3% 7.0% 6.4% 7.6% Working Capital & Liquidity Ratios Payables (Days) 26.6 29.1 32.8 29.9 29.1 29.5 Inventory (Days) 22.1 23.0 27.4 37.5 35.0 33.0 Receivables (Days) 34.8 30.4 26.6 38.2 39.0 37.0 Current Ratio (X) 2.1 1.7 1.5 1.2 1.7 1.6 Turnover & Leverage Ratios Fixed Asset Turnover (X) 0.8 0.7 0.7 0.6 0.5 0.5 Total Asset Turnover (X) 0.5 0.4 0.4 0.4 0.4 0.4 Debt Equity Ratio (X) 0.6 0.7 0.7 1.0 1.1 1.1 Dividend Pay Out Ratio 38.4% 32.0% 45.1% 20.0% 20.0% 20.0% Dupont Analysis (Decomposed ROE) 13.1% 16.4% 13.2% 12.3% 9.9% 12.6% Tax Burden (PAT / PBT) 0.7 0.8 0.8 1.0 0.8 0.8 Interest Burden (PBT / PBIT) 1.1 1.2 1.0 0.9 0.9 0.9 EBIT Margin 18.1% 20.9% 19.0% 15.3% 15.8% 17.8% Total Asset Turnover Ratio (Net Sales / Total Asset) 0.5 0.4 0.4 0.4 0.4 0.4 Leverage Ratio (Total Asset / Total Equity) 1.9 2.0 2.0 2.2 2.4 2.4 Valuation Ratios DPS (Rs.) 4.3 4.2 6.0 2.5 2.0 2.8 BVPS (Rs.) 88.9 97.5 104.1 99.0 106.8 117.7 EPS (Rs. Cr) 11.2 13.3 13.3 12.5 10.1 14.1 P / E (X) 12.3 10.3 10.3 11.0 13.5 9.7 P / BVPS (X) 1.5 1.4 1.3 1.4 1.3 1.2

July 23, 2015


es


Disclaimer

This is solely for information of clients of Choice Broking and does not construe to be an investment advice. It is also not intended as an offer or solicitation for the purchase and sale of any financial instruments. Any action taken by you on the basis of the information contained herein is your responsibility alone and Choice Broking its subsidiaries or its employees or associates will not be liable in any manner for the consequences of such action taken by you. We have exercised due diligence in checking the correctness and authenticity of the information contained in this recommendation, but Choice Broking or any of its subsidiaries or associates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this recommendation or any action taken on basis of this information. This report is based on the fundamental analysis with a view to forecast future price. The Research analysts for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. Choice Broking has based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Choice Broking makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. The opinions contained within the report are based upon publicly available information at the time of publication and are subject to change without notice. The information and any disclosures provided herein are in summary form and have been prepared for informational purposes. The recommendations and suggested price levels are intended purely for stock market investment purposes. The recommendations are valid for the day of the report and will remain valid till the target period. The information and any disclosures provided herein may be considered confidential. Any use, distribution, modification, copying, forwarding or disclosure by any person is strictly prohibited. The information and any disclosures provided herein do not constitute a solicitation or offer to purchase or sell any security or other financial product or instrument. The current performance may be unaudited. Past performance does not guarantee future returns. There can be no assurance that investments will achieve any targeted rates of return, and there is no guarantee against the loss of your entire investment.

POTENTIAL CONFLICT OF INTEREST DISCLOSURE (as on date of report) Disclosure of interest statement – • Analyst interest of the stock /Instrument(s): - No. • Firm interest of the stock / Instrument (s): - No.

Choice’s Rating Rationale The price target for a large cap stock represents the value the analyst expects the stock to reach over next 12 months. For a stock to be classified as Outperform, the expected return must exceed the local risk free return by at least 5% over the next 12 months. For a stock to be classified as Underperform, the stock return must be below the local risk free return by at least 5% over the next 12 months. Stocks between these bands are classified as Neutral.

Choice Equity Broking Pvt. Ltd. Choice House, Shree Shakambhari Corporate Park, Plt No: -156-158, J.B. Nagar, Andheri (East), Mumbai - 400 099.

+91-022-6707 9999

+91-022-6707 9959

www.choiceindia.com

Institutional Equity Team

Name Designation Email id Contact No.

Ajay Kejriwal President [email protected] 022- 6707 9850

Sumeet Bagadia Head of Research [email protected] 022 - 6707 9830 Amit Singh VP - Institutional Sales [email protected] 022 - 6707 9859 Devendra Gaikwad Sr. Manager - Institutional Sales [email protected] 022 - 6707 9877

Rajnath Yadav Research Analyst [email protected] 022 - 6707 9975

Satish Kumar Research Analyst [email protected] 022 - 6707 9974

Chandrakant Maske Research Associate [email protected] 022 - 6707 9976

Kunal Parmar Research Associate [email protected] 022 - 6707 9982

Ritesh Patel Research Associate [email protected] 022 - 6707 9978

Amit Pathania Research Associate [email protected] 022 - 6707 9979

Vikas Chaudhari Research Associate [email protected] 022 - 6707 9988

Trirashmi Ghoderao Research Advisor [email protected] 022 - 6707 9972

Rating Legend

Rating Upside

BUY Absolute Return >15%

Accumulate Absolute Return Between 10-15%

Hold Absolute Return Between 0-10%

Reduce Absolute Return 0 To Negative 10%

Sell Absolute Return > Negative 10%

INITIATING COVERAGE

Documents

INITIATING COVERAGE NTPC Ltd - …reports.choiceindia.com/Reports/FUR230720150414181.pdf · 52 week H/L (Rs.) (PLF) Particulars through Forecast Projections years Valuation NTPC Ltd