Powering Ahead - NTPC

NTPC, which is the largest power generator in India with an installed capacity of 27,904 MW, seems to be a good buy and there are compelling reasons behind the same. This includes factors like its better-than-expected financial performance for FY09, increased focus on capacity addition programme, increased capital expenditure through surplus cash, expected improvement in the plant load factor (PLF) and expected improvement in the earnings due to new CERC guidelines. On the valuation front, the scrip is comfortably placed. The CMP of Rs 222 discounts its FY09 earnings by 22.30x (EPS Rs 9.95) and the EV/EBITDA stands at 16.90x. We recommend investors to buy the scrip at its current levels with a target price of Rs 290 in the next one year.

As mentioned earlier, NTPC is the largest power generator in the country. However, if we take a look at the capacity addition of 1,000 MW in the last year, NTPC was short of its target of 1,250 MW. But the new stable government is likely to be more focused on execution and capacity addition and hence we expect NTPC to gain from a stable policy environment in terms of capacity additions. Now the company is planning to add 2,800 MW in FY10, 3,650 MW in FY11 and 6,430 in FY12. This would ensure that the company maintains its growth trajectory. As regards capital expenditure, the total capex is estimated at Rs 90,200 crore. The capex is expected on the higher side for FY10 (Rs 24,526 crore) and FY11 (Rs 24,900 crore). To be funded through loans from financial institutions. Further, the total cash available for the company as on March 31, 2009 is around Rs 16,271 crore. Here the company is looking forward to acquire the state utilities-owned power plant that operates at very low PLF. Such an acquisition would result in deployment of cash into assets that will earn regulated returns with a potential upside from efficiency gains. It also intends to venture into related areas like coal mining, distribution, transmission, merchant sales, gas exploration etc. But it will be too early to comment on the revenues from those segments.[PAGE BREAK]

NTPC reported improved PLF in 4Q09 and it is expected to stay at higher levels of more than 94 per cent (92 per cent) in FY10 also, as the company plans to import around 12.5 MT of coal against 8.25 MT planned for FY09. Additionally, the new CERC norms could be positive as the management has stated that the base R-o-E has increased to 15.5 per cent as compared to 14 per cent earlier.

On the financial front, the company has posted an impressive performance in FY09. Its net sales on a consolidated basis stood at Rs 44,245.27 crore and its bottomline at Rs 8,092.46 crore as compared to Rs 38,635.03 crore and Rs 7,469.92 crore respectively in FY08. Considering the increased capacity, PLF, and increased return on equity, the company is expected to put in a good performance in FY10 too. For FY10, analyst consensus indicates a topline of around Rs 49,349 crore and a bottomline of Rs 8,873.50 crore (EPS of Rs 10.70). Putting all these factors together, we recommend investors to buy the scrip at current levels with a target price of Rs 290 in the next one year.