BUY
NTPC is India's largest power generating company with an installed capacity of 27,904 MW (about 20% of India's total installed capacity). It presently operates 15 coal based, 7 gas based and 4 joint venture power projects with a nationwide presence. NTPC contributed 28.5% of the country's entire power generation during the year 2006-07 and plans to become a 75,000 MW powergenerating company by 2017. NTPC has moved ahead in diversifying its portfolio to emerge as an integrated power major with presence across the entire energy value chain. Besides its core business of power generation, it also provides consultancy in the areas of power plant construction and power generation to companies in India and abroad.
We believe the recent addition of capacity and significant rise in demand for power will drive the incentive-led profitability of the company in the near term. We expect with good terms and arrangements with the equipment vendor the company will not only reduce the project execution risk, but also deliver additional returns to the shareholders. Further with better fuel linkage through captive coal mines ,better terms with fuel suppliers, and with the implementation of merchant facilities, the company will raise its "Spark Spread" (difference between Unit Tariff and Fuel Cost Per Unit) which will drive the long term profitability of the company. We have used sum of the parts (SOTP) valuation to value NTPC on a consolidated basis. We expect with the addition of its planned capacity, the core revenue will grow at CAGR of 17% and the net profit at 17.3% CAGR over FY07A-FY13E. We initiate coverage on the company with a BUY rating with a target price of Rs 318 over next 12months
Concrete arrangement for future capacity addition
We view NTPC's project execution skills is among the best in the world. Having a significant human resource bandwidth in the power sector the company will continue to maintain its project execution track record with reasonable arrangement with its vendors and contractors. It instills confidence in us when we view the concrete business arrangements made by the company with BHEL and TELK. We believe except for gas based plants, capacity addition through the other mode of generation of NTPC would complete in time. However we trust the gas dispute between RIL(Reliance Industries Ltd) and NTPC would be resolved soon. Thus on a stand alone basis, NTPC would be having 40,810 MW of capacity by the end of the FY13, which includes its merchant 2120 MW capacity. We believe the shareholders stand to gain maximum benefits of the expansion on the backdrop of undiluted equity capital.
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