>NTPC (PRABHUDAS LILLADHER)

According to the recent news flow, the power ministry has plans to permit NTPC to sell power in the open market. This move, depending on which capacity (existing or incremental or unallocated) will be allowed to unleash, will have an impact on the earnings as well as ROEs. However, we believe that the gains are based on:

• NTPC’s capacity addition ability
• Merchant rates Quantum of gains allowed to be retained by the generator
• Merchant power approval may aid re-rating

■ Backdrop: The current operating capacity of NTPC stands nearly at 27850MW, of which 15% allocation is decided by the Central Government known as ‘Unallocated or free power’. The capacity under construction stands at nearly 18000MW. The targeted capacity addition for FY10 is 3300MW; of this, 500MW has been commercialized and 480MW has been synchronized.

■ Possibilities for sale of power through merchant route: Assuming merchant rates at Rs4.5kw/hr,

• Option 1: 15% of the incremental capacity can take the potential company ROE in FY11E from 14.4% to 14.5% and in FY12E from 15.1% to 17.3%.
• Option 2: 50% and 25% of the unallocated power from the new and existing capacity, respectively, can take the potential company ROE from 14.4% to 16.5% in FY11E and from 15.1% to 18.5% in FY12E.

■ Valuations and Outlook: The recent run-up in the stock has been sharp on account of the league of power IPOs and valuations enjoyed by them. The company is planning an FPO in February 2010 which will offload 5% of the equity, thereby, raising Rs100bn. We believe that any decision on merchant sales would be positive for the company and further aid re-rating of the stock upwards.

Though the company’s near-term ROEs would improve only on brisk capacity addition and merchant power rates, improvement on the outlook of long-term ROEs would substantially re-rate the stock upwards. At CMP of Rs228, the stock is trading at P/BV of 3x FY10E and 2.7x FY11E. We reiterate ‘Accumulate’ rating on the stock.

To read the full report: NTPC