>NTPC(Merrill Lynch)

2Q: Higher Fuel Price Drive Rec. PAT +12%YoY, EBITDA+17% Greater value of efficiency incentives from higher fuel costs (gas / LNG +100%YoY & Naphtha +66%) drove NTPC’s Rec. PAT to rise by 12% YoY,despite just 3.5% volume growth . 2Q09 income climbed +26.4% YoY, and EBITDA reached Rs32.5bn, +17% YoY. Coal PLF fell (83.1% v/s 83.4%) on coalshortages. We lower our Price Objective to Rs165 from Rs202 to factor in higher equity risk premium (6% v/s 5.7%) and 5% discount to DCF. We maintain our Buy
rating, however, given that the stock offers defensive growth, NTPC is cash-rich (US$3.4bn), and it has pipeline of +20% RoE projects.

Key drivers of NTPC’s growth ahead are:

1 Secure ~3.71mmscmd of gas from 1st tranch of Reliance KG gas for existing plants to boost RoE of its gas based projects operating at sub-optimal utilization

2 Potential hike in regulated return from April 1, 2009 by ~100bps on higher rates

3 Capacity expansion to 50GW by FY12E v/s 28GW – FY09 mark the peak in
NTPC’s efficiency, then on it will have to depend on capex to drive its growth.Monitize low cost fuel sources – captive coal mines (reserves 4.4bt) & LNG (~US$3-4/mmbtu from Nigeria)

4 PLF & Heat rate linked incentives to compensate for cap on spot market rates Value accretive FY08-10E capex CAGR +46%YoY; 3GW p.a.
NTPC plans capex of Rs126bn in FY09E +47%YoY and in FY10E of Rs186bn
+48%YoY. It has accelerated order placements of additional 2.5GW of projects (likely on BHEL) to compensate for delay in some projects and achieve 22GW add in XI Plan. It plans to commission 3GW in FY09E v/s 1GW (own) in FY08.

Concerns: a) 4GW or 18% of NTPC’s XI plan capacity ordered on Russian
suppliers / Doosan could get delayed by ~2 years; and

b) delay of over 1 year in production (FY10E) at its 1st captive mine due to land acquisition issues.

For full Report NTPC(Merrill Lynch)