NTPC FPO Analysis - Review

Sound and stable

Solid long-term growth potential, but lackluster track record

NTPC, a public sector undertaking under the Ministry of Power, is the largest power generating company in India with an installed power generation capacity (including joint venture capacity) of about 30,644 MW end September 30, 2009. Of the owned power generation capacity of 28,350 MW, the share of coal-based thermal power plants is 86%, operated through 15 coal-based power stations. The balance 14% is gas-based, operated through seven gas-based power stations (including one naphtha-fired station). In fiscal ended March 2009 (FY 2009), the company contributed 28.6% of the total power generation of India.

Presently, NTPC is engaged in construction of projects representing 17,930 MW (including 4,000 MW undertaken by JV companies). It is also pursuing a basket of projects of approximately 33,000-MW capacity in various stages, including projects for which tenders have been invited, feasibility report (FR) prepared, or a FR is under preparation and approval, to achieve its stated goal of 75,000 MW capacity by FY 2017.

NTPC has embarked on diversifying its fuel mix. The company had 1,920-MW hydroelectric power projects under construction end September 30, 2009. About 552 MW is under bidding. It is also preparing FRs and detailed project reports for hydroelectric power projects to achieve hydroelectric capacity of approximately 9,000 MW by FY 2017. Similarly it is also seeking other renewable energy projects such as wind and solar to have 1,000-MW generating capacity from other renewable sources by FY 2017.

NTPC continues to diversify into areas such as coal mining, power trading and distribution to become an integrated power company. It has been awarded eight coal-mining blocks by the government of India including two blocks awarded for development under a JV with Coal India. In 2002, it incorporated NTPC Vidyut Vyapar Nigam, a power-trading subsidiary, which has grown to become the second largest power trader in the country. By leveraging its technical, operational skills and knowledge base, NTPC has developed a consulting business offering consulting services relating to capacity addition, operation, maintenance, renovation & modernization and performance improvement both in India and overseas. Total revenues from consulting business stood at Rs132.5 crore in FY 2009 compared with just Rs 34.1 crore in FY 2004. The company proposes and has initiated work for equipment manufacturing to ensure supply of critical equipment and spare parts, and an electricity distribution business.

To capitalize on the opportunity from sale of merchant power, NTPC is implementing 2,120-MW power projects as merchant power plants for selling power outside long-term power purchase agreements (PPAs) at market-based prices. As provided by the National Electricity Policy, 2005, up to 15% of new generating capacity may be sold outside long-term PPAs. However, some of the power generation from the company's merchant capacity may also be sold under PPAs.

The government of India, which owns 89.5% of the paid-up capital of the company, is divesting 5% of its stake through this follow-on offer.

Strengths

Has operational power generation capacity of over 30,644 MW. Is targeting a diversified power generation capacity 75,000 MW by FY 2017 at a CAGR of 13%. Has close to 17,930-MW capacity under construction including 4,000 MW by JV companies. Has projects with an aggregate capacity of another 10,000 MW is under bidding and about 25,000 MW for which sites have been identified and studies are under progress.

Has a strong track record in operating its plants at higher efficiency. In terms of availability factor, a measure of how often a station is available to generate power, and average plant load factor (PLF), a measure of how much of its capacity a plant actually uses to generate electricity, the power stations of NTPC are efficiently operated. Out of 15 coal-based power stations, five stations have operated at a PLF of greater than 95% and one among the five even operated at a PLF of 99.4% in FY 2009. Considering all 15 coal-based power stations, the average PLF works out to 91.1% with an average availability factor of 92.5% in FY 2009 compared with the all-India average PLF for coal-based stations of 77.2%. The gas-based stations of the company operated at an average availability of 86.7% in FY 2009 and an average PLF of 67.0% compared with the all-India average PLF for gas-based stations of 57.6%. Moreover, the PLF of gas-based stations improved to 78.4% in the first half of FY 2010 due to increased gas availability.

All owned installed capacity of 28,350 MW is contracted for sale through long-term PPAs with state electricity boards (SEBs) and distribution companies. More than 90% of its sales of electricity is to SEBs and state owned distribution companies for which payments are secured through letter of credit and the tripartite agreements. This assures steady cash flow. Moreover, will be able to cash on the higher unscheduled interchange charges if able to operate the plant at higher scheduled capacity or the client fails to take the generated capacity in view of the strong demand-supply gap in the country. Moreover, the new generation units are eligible for 15% merchant sales component. This would allow exploitation of the current strong merchant power tariff market in the country.

Has ensured fuel supply with long-term supply agreements. Had signed long-term coal supply agreements covering 12 of its 15 coal-based stations with Coal India and its subsidiaries in September 2009. Also executed gas supply agreements with Gail India for gas-based power stations. These are valid up to 2021.

The balance sheet is strong to leverage for future investment commitments. Cash on hand in consolidated books was about Rs 17341.20 crore and net worth Rs 61846.20 crore end September 2009. The current cash position is more than enough for its equity commitments in JVs and special purpose vehicles.

Is set to become a Maharatna company, which will bestow more operational flexibility.

Weaknesses

Has little experience in setting up hydel power capacity as well as in coal mining. Despite having allotted six captive coal blocks, proposes to develop these blocks through a mine developer-cum-operator (MDO). Is yet to appoint a MDO. This might delay the coal development projects as well as the three power plants linked to it. Also, is yet to get the full land for the development of the mines.

Requires 168 tonnes of coal at 85% PLF and 16.4 Million Metric Standard Cubic Meter Per Day (mmscmd) of gas at 85% PLF by 2012. Despite long fuel supply agreement, India's mine development is not keeping pace with addition of generation capacity. This might lead to short supply of fuel and compel to tap overseas market. Though the fuel cost is a pass-through item, might be forced to operate at lower PLF if adequate coal is not available at right time.

In the first two-and-a-half years of the Eleventh Five-Year Plan, has added only 3,240 MW. Given the engineering, procurement and construction (EPC) and equipment constraint in the country for commissioning of power plants, the target of an installed commercially operational capacity of 50,000 MW by March 2012 from the current 30,644 MW will be a Herculean task.

Valuation

NTPC's net profit growth in the last few years has been lackluster. The floor price of Rs 201 discounts the annualized nine-months ended December 2009 consolidated EPS of Rs 10.7 by 18.8 times.

While the current price is Rs 207, the 50-day average, 100-day average and 200-day average works out to Rs 219, Rs 215, Rs 210. The scrip's beta is very low at 0.6, ensuring low market-related risk. Given the long-term growth prospects of the power sector and its dominant position and sound growth strategy, NTPC will continue to be fancied by institutional investors for taking low-risk long-term exposure to India's power sector.