NTPC: Rising RoE to drive valuations high; upside of 23%

31 January 2013

Update | Sector: Utilities

NTPC

BSE SENSEX

S&P CNX

20,005

6,056

CMP: INR156

TP: INR192

Buy

Entering a growth era

Rising RoE to drive valuations high; upside of 23%



Bloomberg

Equity Shares (m)

52-Week Range (INR)

1,6,12 Rel.Perf.(%)

NTPC IN

8,245.5

190/139

-3/-17/-28



M.Cap. (INR b)/(USD b) 1,286/24

FY13 marks the beginning of a growth era for NTPC. Over FY13-16, we expect it to add

13GW of capacity - an average of 3.3GW/year v/s historic average of 1.5-2GW/year.

It is well placed on the fuel front, with targeted coal production from captive mines

scaling up from no contribution in FY13 to ~37mtpa by FY17.

19% earnings CAGR, 240bp RoE expansion are key triggers for re-rating.

Robust operating performance ahead

Valuation summary (INR b)

Y/E March

2013E 2014E 2015E

728.0

186.0

111.8

13.6

23.5

104.5

13.5

12.3

42.2

11.7

1.5

9.2

3.1

803.0

218.7

128.0

15.5

14.5

113.6

14.2

13.0

41.2

10.2

1.4

8.0

3.5

Sales

648.0

EBITDA

166.8

90.5

Adj EPS (INR) 11.0

EPS Gr. (%)

13.5

BV/Sh. (INR) 96.6

RoE (%)

11.8

RoCE (%)

12.6

Payout (%)

41.7

Valuations

P/E (x)

14.4

P/BV (x)

1.6

EV/EBITDA (x) 9.7

Div. Yield (%) 3.0

FY13 marks the beginning of a high growth era for NTPC, with highest ever capacity

addition target of 4.2GW (2.7GW achieved), coal-based generation growth of

~8% in YTDFY13 (v/s 2% CAGR over FY10-12) and commercialization of 3.8GW in

YTDFY13, higher than the total of 1.5GW in FY11 and 1.2GW in FY12. Over FY13-16,

we expect NTPC to add 13GW of capacity - an average of 3.3GW/year v/s historic

average of 1.5-2GW/year. Higher commercialization coupled with better operating

rates would be the key driver of earnings growth. Also, there is visibility on 13th

Plan and 4.9GW of capacity already under construction, while ~10GW is under

award. NTPC is thus better placed than other developers - both on the operational

and the financial front.

Well placed on fuel front; captive mines in close proximity

NTPC aims to achieve plant availability factor (PAF) of 90% for its operating

capacity under the 12th Plan, with minimal imports of 20-22m tons, owing to

contribution from captive mines. Production from its first captive mines at Pakri

Barwadih is set to commence in FY14, with production target of 3mtpa. This along

with other captive mines would be scaled up to ~37mtpa by FY17. We note that

~30GW of NTPC's capacity is within ~400km of its five mines, which provides

flexibility on fuel supply chain management. NTPC has in-principle approval from

the Minstry of Coal (MoC) for additional blocks to cater to ~8.5GW of capacity.

Shareholding pattern %

As on

Dec-12 Sep-12 Dec-11

Promoter

84.5

Dom. Inst

7.5

7.7

7.9

Foreign

4.4

4.0

3.8

Others

3.6

3.8

Expect robust earnings growth, RoE expansion over FY13-15

We expect NTPC to deliver earnings CAGR of 19% over FY13-15, backed by capacity

addition and generation growth. Lower generation growth had impacted earnings

growth over FY10-12, which is unlikely going forward, with improving cash flows

of distribution companies (DISCOMs), lower gas-based generation driving offtake

from coal projects, etc. Also, higher capitalization and relatively low capex

intensity would bring down CWIP, leading to a 240bp improvement in reported

RoE. This will also improve FCFE for NTPC from INR3b in FY13 to INR65b in FY15.

Stock performance (1 year)

Valuations

NTPC is quoting at historic lows on the back of 25% underperformance to

benchmark indices over the past 12 months. Strong visibility on business/earnings

growth, secure business model and low valuations are key triggers for re-rating.

We expect NTPC to report an EPS of INR13.6 for FY14 and INR15.5 for FY15. The

stock trades at PER of 10x and P/B of 1.4x on FY15 basis.

Buy.

Sources of exhibits in the report

include MoP, CEA, Companies, and

MOSL

31 January 2013

NTPC

Capacity addition robust; front-ended in 12th Plan

Growth option sizable; better placed than other developers



NTPC plans capacity addition of 4.2GW in FY13, of which 2.7GW is already

commissioned in YTDFY13 - its highest capacity addition in a year. In the 12th Plan

period, NTPC plans to achieve capacity addition of 14GW, in line with the Central

Electricity Authority's (CEA) estimate. Of this, 13.2GW is expected over FY13-16, an

average capacity addition of 3.3GW/year. This compares with an average of ~1.5GW/

year over FY82-07, which moved up to ~2GW in 11th Plan. NTPC is witnessing an

orbit change in capacity addition under the 12th Plan.

Similarly, capacity under construction for the 13th Plan is 4.9GW and an additional

~10GW of projects will soon enter construction phase, entailing robust capacity

addition under the 13th Plan. This will also drive commercialization (CoD) for NTPC,

entailing robust growth in regulated asset base (RAB) and thus, core earnings.

Capacity addition under the 12th Plan was partially propelled by slippages

witnessed under the 11th Plan - addition of 9.6GW vs initial target of 22GW. Under

the 11th Plan, NTPC's capacity addition was slower than expected owing to certain

execution bottlenecks - some large projects witnessed contractual and other

issues. As NTPC overcomes the issues pertaining to its large projects, this will

lead to front-ended capacity addition in the 12th Plan. 6.8GW of bulk tender

projects are likely to be awarded soon, taking the capacity under construction for

the 13th Plan to ~12GW. An additional 3GW of projects is under bidding.

This provides strong visibility in capacity addition growth for NTPC over the next

decade, making it better placed than other developers. In the current uncertain

macro enviornment, other developers are either not willing to commit to new

expansion or have no capability (high leverage, lack of PPA/FSA visibility, burden

of existing unviable projects, etc). NTPC offers better growth option in the

generation space. Even assuming a recovery in the sector, a new project could

take ~5 years for commissioning - a period of growth holiday for several developers,

while NTPC would continue to witness linear growth.

Large project commissioning at single location would drive efficiency. Top-11 stations

would account for 60% of its coal-based capacity, while projects awarded under

bulk tendering would provide for further brownfield addition. Proximity of projects,

captive coal blocks would improve flexibility in fuel supply management.

Capacity addition set to accelerate (GW)…

NTPC is likely to witness

~40% growth in 12th Plan

capacity addition on the

FY12 base, up 46% v/s the

11th Plan. However, the

target to reach 75GW by

FY17 is scaled down.

31 January 2013

NTPC

…taking NTPC into a new growth orbit

NTPC will improve its

capacity addition run rate

under the 12th Plan; this

trend is likely to be

maintained under the

13th Plan as well.

Front-ended capacity addition in 12th Plan (GW)

Momentum of capacity addition has picked up (TTM, GW)

13.2GW of the 14GW capacity addition under the 12th Plan is expected over FY13-16, in line with the CEA estimate.

11th Plan witnessed sizable slippages - few large projects witnessing execution issues

Execution issues at few

of its large projects like

Sipat, Barh, N. Karanpura,

etc, and delays in other

projects led to bunching

up of capacity addition - a

spillover of slippages

from the 11th Plan.

Capacity addition driving commercialization (GW)

Growth option sizable; visibility exists for 13th Plan

Under construction capacity

Project under award/bidding

6.8

3.1

9.9

12th plan*

11.9

Bulk tender

13th Plan

4.8

Others

Total

16.6

Total

*2.7GW already commissioned

Visibility of capacity addition under the 13th Plan is high, with

4.9GW of capacity already under construction and 10GW likely to

be awarded soon.

In YTDFY13E, NTPC has already commissioned 4GW of capacity, higher

than the total of FY11 and FY12 - a key driver of earnings growth.

31 January 2013

NTPC

Large capacity at single location, proximity to captive mines to bring efficiency

Top-11 stations account for 60% of capacity (coal)

Location advantage for projects, mines

[Landmark: A - Farakka (2.1GW), B - Kahalgaon (2.3GW), C - Barh

(3.3GW), D - Vindhyachal (4.8GW), E - Singrauli (2GW), F - Rihand

(3GW), G - Korba (2.6GW), H - Sipat (3GW), I - Lara (1.6GW), J -

Talcher (3.5GW), K - Gajmara (1.6GW)]

NTPC would draw sizable operational efficiency, with large capacity at single location. Also, the proxmity of its stations to captive mines

would further bring flexibility in fuel management. ~30GW of its capacity and 5 mines would be in the radius of ~400km.

NTPC offers better growth option than other developers

Comparative capacity addition

Debt-equity high for IPPs (Sep-12)

Limited scope for growth for IPPs

(GW)

NTPC

TPWR

RPWR

APL

JPVL

NHPC

JSWEL

CESC

Installed

Cap

39.0

6.9

1.5

5.3

2.0

5.6

2.6

1.3

Under

const.

16.6

1.7

10.7

3.9

3.6

4.2

0.5

1.2

Pipeline

9.9

8.4

18.1

7.3

9.2

11.2

7.0

1.8

In the current uncertain macro enviornment, other developers have either not commited to new capacity or have limited bandwidth to take

up new capacity. NTPC, on the other hand, is likely to witness linear growth.

NTPC now aims at 128GW by 2032

Capacity addition strong, despite higher base (GW)

Well placed to attain 100GW+ capacity

Particulars

FY13E Capacity (incl JV)

Under Construction

Under bidding

Total

Feasibility report

approved, PPA signed

Total

Capacity Comments

41,174 Current capacity

including JVs

16,600 Includes 4.8GW for

13th Plan

10,000 6.6GW under bulk tender +

3.1GW of other projects

67,774

26,500

94,274

NTPC's aim to reach 128GW of capacity by 2032 is possible given that it has already signed up large capacity under regulated structure.

31 January 2013

NTPC

Well placed on fuel front; captive mines in close proximity

90% PAF possible with minimum imports; issues at Farakka/Kahalgaon being

addressed

Fuel supply was severely impacted in FY11/12 on flat production by Coal India. In

YTDFY13, Coal India's production grew 7.2% YoY and dispatches to the Power sector

improved 11% YoY. This is a key change for NTPC, given its proximity to coal mines,

evacuation through its merry-go-round (MGR) system, etc. Over FY10-12, NTPC's PAF/

PLF for coal projects has come off ~200/500bp. While part of the decline in PLF was

due to lack of demand / drawal schedule by DISCOMs, PAF decline in FY12 was partly

due to receipt of wet coal in 2Q (with which PAF cannot be declared), followed by

strike in Coal India and unrest in Singareni Collieries (SCCL). In YTDFY13, domestic

coal receipts have improved. Availability has been strong, except in 2QFY13, when

NTPC took a planned maintenance shutdown.

Also, a large part of the fuel supply issues pertain to its Farakka (2.1GW) and Kahalgaon

(2.3GW) projects, where NTPC is already working on establishing waterways to

transport imported coal / coal from ECL owing to constrained rail rake availability. The

waterways should be up and running in 1HFY14, providing capacity to handle/receive

~3mtpa of coal.

Under the 12th Plan, NTPC plans to attain 90% PAF for its existing/upcoming projects

through a mix of linkages, captive mine production (37m tons by FY17, beginning

from 3m tons in FY14) and 20-25m tons of imports (40-45m tons of domestic coal

equivalent). Given that NTPC's PPA structure allows fuel cost as pass-through and the

progress on its captive coal block, we remain upbeat on fuel supply security. In addition

to its existing captive blocks, the Ministry of Coal (MoC) has given in-principle approval

for allocation of new blocks to feed its upcoming capacity of ~8.5GW.

The recent proposal by MoC to award coal blocks on auction also puts NTPC in an

advantageous position (qualification criteria based on plant location/status of capacity

under construction, past coal block development experience/status, financial

position, etc). Given its financial strength (cash/cash equivalents of INR215b as at

September 2012) and favorable positioning on other qualification criteria, NTPC can

lap up sizable reserves, which would lend further security to its growth option.

Flat domestic coal production in FY11/12 hurt Power sector, improvement likely in FY13-17

Coal India's production

was flat for FY11/12,

creating a scarcity

situation for the Power

sector. Over FY13-17,

domestic coal production

is expected to grow at a

CAGR of 6%.

31 January 2013

NTPC

PAF down but still above 90% for coal projects

PAF for NTPC's coal

projects has declined in

the last two years owing

to several issues, but is

still above 90%.

Quarterly PAF for coal projects - 2Q for FY12/13 impacted by one-offs

PAF was impacted owing

to monsoon and wet coal

receipt in 2QFY12, and

maintenance shutdown

in 2QFY13. NTPC's PAF

should be viewed as

yearly average, evening

out quarterly blips.

67% of coal shortage in FY12 was attributable to a single project

Station

Kahalgaon

Vindhyachal

Simhadri

Ramagundam

Talcher Kaniha

Farakka

Singrauli

Dadri coal

Rihand

Unchahar

Badarpur

Total

Coal shortage

(m tons)

4.2

0.5

0.4

0.3

0.1

0.0

6.3

% of total

100

Generation Loss

(MUs)

4,855

749

499

546

370

195

179

191

152

132

7,882

% of total

100

Farakka and Kahalgaon

are the key projects

facing issues. Simhadri

and Ramagundum

projects faced coal

shortage due to the

Telangana issue.

NTPC project PLF ex-Farakka/Kahalgaon is better

Coal projects other than

Farakka and Kahalgaon

projects have been

operating at decent PLFs.

31 January 2013

NTPC

Inland waterways to ease transportation bottlenecks

For its Farakka and Kahalgaon projects, NTPC receives supplies from Eastern

Coalfields' Rajmahal mines, where prodution ramp-up is a key bottleneck. In

addition, the shortfall in wagon availability along with 120% line occupancy ratio on

the Eastern, South Eastern and East Coast railway routes pose a major transport

bottleneck. To overcome this problem, NTPC is establishing inland waterways to

transport imported coal. Currently, the coal is being transported only to Paradip

port. The project will need an investment of INR6.5b-7b. NTPC entered into a

tripartite agreement with Inland Waterways Authority of India and Jindal ITF in

August 2011. Jindal ITF will invest in infrastructure creation in lieu of take-or-pay

contract for the transportation of 3mmt of imported coal through inland waterways

to NTPC Farakka to supplement domestic coal for 7 years.

The cost of transporting coal through this route (v/s railways) is competitive. Also,

there exists a possibility of transporting fly ash for export. The creation of the loop

would also help meet fuel requirements for any of NTPC's projects in the northern

region, as also to extract coal from Mahanadi Coalfields' (MCL) Talcher field

(evacuation is a big hinderance at MCL). The project is likely to be operational by

1HFY14. This should help ease fuel supply constraints at Farakka and Kahalgaon. At

Farakka, NTPC will establish a coal conveyor system for transporating coal from the

jetty to the plant site, improving mechanization.

Coal transportation mechanism and coal conveyor for Farakka project

NTPC is well placed to meet 90% PAF for 12th Plan with minimum imports

Particulars (m tons)

FY13E

164.0

119.0

15.0

134.0

3.0

137.0

27.0

15.9

FY14E

187.0

119.0

22.0

141.0

3.0

147.0

40.0

23.5

FY15E

198.0

119.0

25.0

144.0

8.5

3.0

155.5

42.5

25.0

FY16E

205.0

119.0

32.0

151.0

19.5

3.0

173.5

31.5

18.5

FY17E

218.0

119.0

38.0

157.0

37.0

3.0

197.0

21.0

12.4

Coal demand

ACQ supply

LoA/new supply

Total linkages (A)

% of demand

Balance to be met… (B)

- Captive mine

- MoU/E-auction

Total Domestic (A+B)

% of demand

Imports (domes. Eqv.)

Actual Imports

NTPC can meet its target

PAF of 90% with

minimum coal imports.

As supplies from captive

coal mines kick in,

imports would decline

further. This would help

lower fuel cost.

31 January 2013

NTPC

Old FSA framework provides comfort

Current higher

supplies/materialization

under old FSAs are likely

to continue in our view,

as this incentivizes Coal

India.

% of ACQ delivered

95% to 100%

90% to 95%

90%

85% to 90%

80% to 85%

Less 80%

Remarks

20.0% of price of quantity in excess of 95.0%

10.0% of price of quantity in excess of 90.0%

No Compensation

10% of price of shortfall quantity below 90.0%

20% of price of shortfall quantity below 85%

40% of price of shortfall quantity below 80%.

Restoration of captive blocks, status lends confidence

Mine

Reserve Peak Prodn.

Status

(m tons) (m tons) Environment Forest

Land Acqn.

Notification

Obtained

Stage I

obtained

In-principle In process

clearance

available

In-principle In process

clearance

available

MDO app.

Two of these five mines

have already appointed

MDO and pre-

development activity has

begun. Land acquisition

notification, status of

enviornment/forest

clearances provide

confidence.

Pakri Barwadih

1,436

Chatti-Bariatu & South 551

Kerandari

285

Ta l a i p a l l i

1,267

Completed Appointed

Completed Award ready

Completed Tendering

to begin

Completed Appointed

Dulanga

245

Completed Tendering

in process

Total

3,784

Captive coal block ramp-up for NTPC (m tons)

Incremental coal blocks allocations

Projects

Rae Bareilly, UP

Kudgi, Karnataka

Gajmara, Orissa

Barethi, MP

Total

Capacity (MW)

500

1,600

2,400

3,960

8,460

While the current mines can support 12GW of capacity, the Ministry of Coal has given in-principle approval for allocation of additional blocks

for 8.5GW of projects. A sizable part of the incremetnal capacity will be backed by captive coal.

31 January 2013

NTPC

Criteria to allocate coal blocks

Sr Parameter

Total

points

Remarks

The recent guidelines for

qualification under

auction for public sector

undertakings can give

NTPC an upper hand. This

along with its financial

warchest should enable

NTPC to lap up sizable

reserves.

Development of block

allocated in past

Company financial

Preparedness of the plant

Demand Supply gap

Plant location near pit head

Total

Mile stone considered:

Approval of mine plan/GR preparation for

explored blocks

Forest/environment clearance

Land acquisition (including R&R)

Commencement of coal production

6 Net worth -4

Turnover - 2

Mile stone considered:

In principle approval of project approval for

land acquisition

Principle approval of TOR by MOEF

9 To be procured from planning commission for

various states

Mile stone considered:

With in 100 KM - 3

100KM to 500KM -2

500KM and above - 1

We model conservative PAF/PLF for upcoming coal capacity

We model PAF of 85% for

new capacity and 90% for

pre-FY09 capacity.

Increase in PLF would be

marginal, linked primarily

to improvement in coal

supply from captive

mines.

31 January 2013

NTPC

Low cost, high demand, capacity growth to propel

generation growth

Incentive profile, earnings growth set to improve

Over FY10-12, NTPC's capacity addition was 6.9GW and overall generation grew at just

0.7% YoY. While coal-based generation grew at a CAGR of 2%, gas-based generation

declined at a compounded annual rate of 9%. The low generation growth was more

due to lower drawal/demand from DISCOMs rather than fuel supply crunch. In FY11

and FY12, for instance, NTPC lost 19BU and 24.5BU. On the base generation of ~220BU,

this works out to a generation growth of 9% and 11%, respectively. Of this, the loss of

generation owing to grid constraints/lower drawal was 70% and 68%, respectively.

This is set to change, as several DISCOMs have effected tariff hikes and demand

growth in the system has improved to ~8% in YTDFY13 (v/s 3.7% in FY11). Other factors

that would drive generation growth for NTPC are: (1) improvement in domestic coal

availaility, (2) dwindling gas supply, and (3) moderating fuel cost, as the contribution

from captive blocks kicks in.

Generation growth for NTPC has been looking up in YTDFY13 - a key driver of

generation-linked incentives, improving core earnings. Despite a muted 2QFY13,

generation growth in 9MFY13 was 6.1% YoY, much better than -0.5% YoY for 9MFY12.

Coal-based generation growth was a healthy 7.6% YoY (mere 0.7% YoY in 9MFY12),

while gas-based generation declined 6.7% YoY (v/s 9.5% YoY decline in 9MFY12).

9MFY13 generation growth would get further boost, as 4Q is seasonally strong (overall

generation grew 4% YoY in 4QFY12; while coal-based generation grew 6% YoY, gas-

based generation declined 11% YoY).

Muted generation growth in the past adversely impacted NTPC's earnings growth.

Improved capacity addition scenario along with generation growth should drive up

earnings growth, going forward.

All-India demand growth looking up since slump in FY11

Demand growth has

picked up since FY12 and

has been robust at 8% v/s

muted growth of 4% in

FY11, aided by a series of

tariff hikes by DISCOMs.

31 January 2013

NTPC

Generation growth for NTPC has been higher than / in line with growth in capacity addition,

except for FY11/12

Poor generation growth

in FY11 and FY12 was one-

off. Generation growth

should improve, given

the cost advantage

offered by NTPC.

Pattern of generation loss

NTPC

Lower gas-based generation masks overall generation growth

Generation loss due to fuel supply constraints was minimal at 30%. Back-down by DISCOMs was the key reason for loss of generation (~70%).

Lower generation growth has led to flat earnings growth for NTPC

Regulated structure

allows NTPC to earn

generation-linked

incentives. Hence, lower

generation has a bearing

on the core/reported

earnings.

31 January 2013

NTPC

Coal-based project generation growth for NTPC has been looking up in FY13, while gas projects remain in peril

Coal generation and PLFs remain robust, while gas projects continue to face lower generation owing to higher cost of spot LNG.

Revival in generation growth is led by…

A] Tariff hike by DISCOMs - akey driver of improved demand scenario

State

Andhra Pradesh

Bihar

Chandigarh

Chhattisgarh

Delhi

Gujarat

Haryana

Himachal

J&K

Jharkhand

Karnataka

Madhya Pradesh

Maharashtra

Manipur

Mizoram

Nagaland

Orissa

Punjab

Rajasthan

Uttarakhand

West Bengal

FY11

14%

1.5-3.5%

17%

10%

12%

11%

15%

11%

20%

11%

14%

11%

FY12

20%

19%

21%

10%

17%

18%

10%

34%

24%

37%

FY13

14%

12%

11%

24%

15%

3.4%

18%

10%

18%

Source: Company, MOSL

Higher cash inflows have

increased the capability

of DISCOMs to offtake

higher power.

31 January 2013

NTPC

B] Improvement in Coal India's supplies to Power sector (m tons)

Improved domestic coal

availbility helps not only

overall generation, but

also brings down the cost

of generation.

C] Moderation in fuel cost for NTPC, partially helped by lower contribution of gas generation

While decline in blended fuel cost for NTPC has been partially helped by lower contribution of gas-based generation, the decline in imported

coal prices, improved domestic availbility has also lowered costs for coal-based projects. Going forward, we expect further moderation in

average coal cost basket for NTPC, as the contribution of captive mines kicks in.

D] Higher offtake for coal-based projects, given dwindling gas supplies

Gas project PLFs have

been declining, and thus,

demand growth would

have to be met through

coal-based projects.

Projects with lower cost

of generation (such as

NTPC's) would benefit in

merit order of

dispatches.

31 January 2013

NTPC

We model generation growth of ~10% in FY13-15, backed largely by capacity addition

We model a conservative assumption on PLFs and a large part of generation growth is backed by capacity addition.

31 January 2013

NTPC

Capacity addition + generation growth = earnings growth

Expect 19% earnings CAGR, 240bp RoE improvement over FY13-15

We expect NTPC to record earnings CAGR of 19% over FY13-15 v/s flat earnings growth

over FY10-12. Capacity addition of ~8GW, coupled with improved generation growth

will drive earnings growth, in our view. We expect the company's regulated asset

base (RAB) to increase from INR348b as at the end of FY13 to INR418b by the end of

FY15, a CAGR of 10%. While a part of the growth would be driven by capacity addition,

core earnings would get a further boost, as incentive profile improves.

NTPC's incentive profile has been largely skewed towards generation-linked

incentives, supported by higher operating factors. There has been negligible

contribution from capacity-based incentives. Going forward, we expect O&M

incentives to increase significantly, as the Man-to-MW ratio declines from the current

0.9x to 0.5x over FY11-17 (given accelerated capacity commissioning). We estimate

the possible O&M incentives at ~INR10b for FY16 v/s negligible, currently.

As a large part of its capacity under constructions gets commissioned over next four

years, NTPC's CWIP will trend down. New project capex would have a balloning effect

and capex spendng would pick up only after the initial 1-2 years. This, in our view,

would also improve free cash flows. Overall, lower CWIP and superior earnings growth

would lead to improved return ratios for NTPC. We note that reported RoE would

improve by 240bp over FY13-15. There could be further improvement, if the dividend

payout is increased, given that cash/treasury operations yield sub-optimal returns,

suppressing reported RoE.

Regulated equity growth strong on the back of capacity addition

NTPC's regulated equity

will grow, as capacity

addition is front-ended

in the 12th Plan.

31 January 2013

NTPC

Incentive profile will get boost from capacity-linked incentives, returns on mining

While generation-backed

incentives would

moderate going ahead,

capacity-linked

incentives, efficiency

gains and returns from

mining projects would

compensate.

Generation based:

PAF incentive, heat rate efficiencies, UI sales

Efficiency based:

O&M incentives, working capital

New streams:

Sec-80IA benefit, mining income

Man/MW ratio to taper off, given concentrated capacity addition O&M incentives to improve (INR b)

We estimate Man/MW ratio at 0.56x v/s management's guidance of 0.5x by FY17. Also, we have built in a CAGR of ~8% increase in costs over

FY13-16.

Capitalization set to improve, with asset commissioning; CWIP to trend down (INR b)

In the past, NTPC was witnessing higher capex and lower/delayed capacity addition. This is set to change, resulting in a decline in overall CWIP.

31 January 2013

NTPC

Earnings plateau to end, robust growth ahead (INR/share)

Return ratios set to improve (%)

NTPC's earnings cycle moves in phases. FY13-15E earnings CAGR of 19% resembles the strong earnings growth witnessed during FY05-09. RoE

should improved by 240bp over FY13-15.

FCFE set to improve, as projects are commissioned (new capex is moderate in initial years)

Lower capex intensity

and improved cash flows

from capacity addition

would significantly

improve NTPC's FCFE

position.

Payout restricted to ~35% of PAT; scope to increase payout

Expected dividend yield (%)

*Excluding divend tax

Higher availability of cash surplus could lead to better payout, boosting yield on the stock.

31 January 2013

NTPC

Valuations near historic lows; re-rating imminent

Buy with a DCF-based target price of INR192

NTPC has underperformed benchmark indices by 27% in the last 12 months, given

delayed capacity addition, issues relating to fuel supply, captive coal block de-

allocation, lower PAF, etc. The company has, however, demonstrated strong

performance on the operational front in YTDFY13 on all counts - capacity addition,

commercialization and generation growth, following two years of lull.

The stock is trading at 12x one-year forward EPS and 1.5x one-year forward BV - near

historic low valuations. PBT/market cap yield stands at ~13% (on FY15 estimates) v/s

bond yield of 7.8%, providing strong comfort. 19% earnings growth, 240bp RoE

expansion and softening risk-free rate are key re-rating triggers in our view.

In addition, NTPC offers better growth option than any other listed player in an

uncertain macro scenario. 16GW of capacity is under construction, while an additional

10GW is under tendering/development stage. This provides visibility even beyond

the 12th Plan period compared to growth holidays for many IPPs that are unable to

expand/take up new projects, given stretched balance sheets, issues with existing

projects, etc.

Buy;

our DCF-based target price is INR192.

NTPC: DCF valuation

2014E

Profit before tax

148.8

Cash Tax

(37.2)

Depreciation

41.4

Interest (1-tax rate)

15.5

Change in net WC

(4.8)

Cash Flow

163.7

Capex

(184.8)

Free cash flow

(21.1)

NPV

Less: Net Debt

Equity Value

Per share value (INR)

2015E

170.8

(43.2)

49.0

18.9

(31.2)

164.3

(125.3)

39.0

1,898

313

1,585

192

2016E

185.1

(46.8)

55.1

21.7

16.4

231.6

(157.1)

74.5

2017E

206.3

(53.3)

61.3

28.5

(10.3)

232.5

(164.8)

67.7

2018E

221.6

(56.6)

75.4

32.5

(22.6)

250.3

(102.3)

148.0

2019E

245.1

(61.7)

86.4

36.3

(31.3)

274.8

(75.7)

199.1

2020E Post 2020E

264.8

(65.7)

93.2

38.5

(7.7)

323.1

(21.2)

301.9

3,301

Key assumptions and sensitivity analysis

CoE (%)

WACC (%)

Terminal gr (beyond 2020, %)

14.5

10.9

Terminal

Growth

8.9

246

277

317

370

445

WACC (%)

9.9

10.9

206

229

258

296

346

175

192

214

241

276

11.9

149

162

179

199

225

12.9

127

138

151

167

186

31 January 2013

NTPC

NTPC quoting at historic low valuations

A] P/E

B] P/BV

NTPC has underperformed benchmark indices

Earnings yield v/s bond yield

31 January 2013

NTPC

Financials and Valuation

Income Statement

Y/E March

Net Sales

Change (%)

Other operating income

Total Expenditure

% of Sales

EBITDA

Margin (%)

Depreciation

EBIT

Interest

Other Income - Rec.

Profit before Tax

Current Tax

Tax Rate (%)

Reported PAT

EO Exp/(Inc)

Adjusted PAT

Change (%)

Margin (%)

2010

463,226

10.5

339,122

73.2

124,104

26.8

26,501

97,603

18,089

29,341

108,855

21,573

19.8

87,282

2,742

84,540

3.9

18.3

2011

548,740

18.5

422,892

77.1

125,848

22.9

24,857

100,992

21,491

40,995

120,496

29,470

24.5

91,025

11,445

79,580

-5.9

14.5

2012

611,462

11.4

9,073

480,025

78.5

140,511

23.0

27,904

112,607

17,116

27,784

123,275

31,024

25.2

92,251

12,518

79,733

0.2

13.0

2013E

647,993

6.0

7,500

488,700

75.4

166,794

25.7

34,666

132,127

17,012

28,833

143,948

34,304

23.8

109,644

19,189

90,455

13.4

14.0

(INR Million)

2014E

728,023

12.4

7,875

549,924

75.5

185,974

25.5

41,441

144,533

24,224

28,477

148,786

37,232

25.0

111,554

23.3

15.3

2015E

802,958

10.3

8,269

592,563

73.8

218,664

27.2

49,036

169,627

29,556

30,680

170,752

43,169

25.3

127,583

14.4

15.9

PAT growth: We estimate

significant growth in NTPC's

profits led by capacity addition

and generation growth

Balance Sheet

Y/E March

Equity Share Capital

Total Reserves

Net Worth

Deferred liabilities

Total Loans

Capital Employed

Gross Block

Less: Accum. Deprn.

Net Fixed Assets

Capital WIP

Investments

Curr. Assets

Inventory

Account Receivables

Cash and Bank Balance

Others

Curr. Liability & Prov.

Account Payables

Provisions

Net Current Assets

Appl. of Funds

E: MOSL Estimates

(INR Million)

2010

2011

2012

2013E

2014E

2015E

82,455

541,719

596,468

650,457

714,421

779,030

854,264

624,174

678,923

732,912

796,875

861,485

936,719

-1560

3028

6369

394,078

439,803

483,558

529,518

621,795

665,984

1,016,692 1,121,754 1,216,236 1,332,762 1,489,649 1,609,072

668,501

320,888

347,613

321,043

148,071

727,552

335,192

392,360

382,706

123,448

815,680 1,026,882 1,213,328 1,363,850

363,096

397,762

439,203

488,240

452,584

629,120

774,125

875,610

418,278

353,607

351,937

326,722

95,839

90,878

81,432

67,785

NTPC's gearing ratio at 0.6x

provides comfort for future

expansion

Higher amount of cash on book

would allow to participate in

coal block auctions

307,546

353,968

427,958

453,301

494,651

542,130

33,477

36,391

37,029

44,383

49,865

54,997

66,514

79,243

58,325

71,013

79,783

87,995

144,595

161,853

177,686

185,462

203,749

228,905

62,960

76,481

154,919

152,418

161,184

170,107

107,581

130,729

178,423

194,804

213,016

204,067

76,876

103,205

140,230

153,151

174,073

165,550

30,705

27,524

38,193

41,653

38,943

38,517

199,965

223,239

249,534

259,158

282,156

338,956

1,016,692 1,121,753 1,216,236 1,332,762 1,489,649 1,609,072

31 January 2013

NTPC

Financials and Valuation

Ratios

Y/E March

EPS (Adjusted)

Cash EPS

BV/Share

DPS

Payout (%)

Valuation (x)

P/E

Cash P/E

P/BV

EV/Sales

EV/EBITDA

Dividend Yield (%)

Return Ratios (%)

RoE

RoCE

Working Capital Ratios

Fixed Asset Turnover (x)

Asset Turnover (x)

Debtor (Days)

Inventory (Days)

Working Capital Turnover (Days)

Leverage Ratio (x)

Current Ratio

Interest Cover Ratio

Debt/Equity

2010

10.3

13.5

75.7

3.8

41.9

2011

9.7

12.7

82.3

3.8

40.1

2012

9.7

13.1

88.9

4.0

41.5

2013E

11.0

15.2

96.6

4.8

41.7

2014E

13.5

18.6

104.5

5.0

42.2

2015E

15.5

21.5

113.6

5.5

41.2

We expect company's dividend

payout ratio to improve on

account of sizeable cash and

higher FCF

16.3

12.1

1.8

2.6

10.9

2.6

14.4

10.4

1.6

2.5

9.7

3.0

11.7

8.5

1.5

2.4

9.2

3.1

10.2

7.4

1.4

2.2

8.0

3.5

14.1

13.0

12.2

13.3

11.3

12.0

11.8

12.6

13.5

12.3

14.2

13.0

0.7

0.5

0.8

0.5

0.7

0.5

0.6

0.5

0.6

0.5

0.6

0.5

2.9

5.4

0.6

2.7

4.7

0.6

2.4

6.6

0.7

2.3

7.8

0.7

2.3

6.0

0.7

2.6

5.7

0.7

Cash Flow Statement

Y/E March

OP/(Loss) before Tax

Interest

Depreciation

Direct Taxes Paid

(Inc)/Dec in WC

CF from Operations

CF fr. Oper. incl EO Exp.

(inc)/dec in FA

(Pur)/Sale of Investments

CF from Investments

(Inc)/Dec in Debt

Dividend Paid

Interest

Others

CF from Fin. Activity

Inc/Dec of Cash

Add: Beginning Balance

Closing Balance

2010

108,855

18,089

26,501

-21,573

-16,330

115,542

-101,965

8,236

-93,729

32,292

-26,056

-18,089

-28,081

-39,934

-18,121

162,716

144,595

2011

120,496

21,491

24,857

-29,470

-5,405

131,969

-120,714

-24,623

-145,336

53,912

-26,185

-21,491

24,389

30,625

17,258

144,595

161,853

2012

123,275

17,116

27,904

-31,024

-10,463

126,808

-123,700

-27,609

-151,310

44,491

-27,703

-17,116

40,662

40,334

15,833

161,853

177,686

2013E

144,051

17,012

34,666

-34,324

-1,847

159,558

-146,531

-4,961

-151,491

53,144

-33,514

-17,012

-2,908

-291

7,776

177,686

185,462

(INR Million)

2014E

149,063

24,224

41,441

-37,288

-4,711

172,729

-184,776

-9,447

-194,223

92,277

-34,542

-24,224

6,269

39,780

18,287

185,462

203,749

2015E

171,251

29,556

49,036

-43,269

-31,643

174,932

-125,307

-13,647

-138,954

44,189

-38,631

-29,556

13,176

-10,821

25,156

203,749

228,905

Significant improvement in

cash flow from operations

31 January 2013

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