>NTPC: From trot to gallop (ICICI SECURITIES)

We maintain BUY on NTPC with Rs243/share target price owing to: i) strong 14.2% regulated book CAGR with >2.9x rise in the pace of capacity addition to 15.8GW through FY11E-15E versus 5.4GW over FY06-10, ii) foray in merchant power (500MW Korba & 500MW Farakka) to gain from the current power deficit, thus boosting earnings – this will also mark the beginning of a new era for NTPC as it prepares for a non-regulated regime, iii) FPO overhang behind and iv) attractive valuations. Key risks are: i) inability to manage imported coal and captive production and ii) slow down in project accrual pace with mandatory competitive bidding beyond FY11.

■ Improved execution pace to boost regulated book. We expect 14.2% regulated book CAGR through FY11E-15E owing to increased pace of execution. NTPC is likely to commercialise ~15.8GW in FY11E-15E versus 5.4GW in FY06-10 due to increased focus on meeting XI Five Year Plan (FYP) targets, resolution of disputes with suppliers, significant rise in BHEL capacity and improved gas availability.

■ Merchant foray of 1GW – New beginning. NTPC has planned ~1GW merchant capacity addition in FY11E-12E. This will boost FY12E earning 6.4%, which will taper-off with softening merchant rates by FY15. We believe the foray marks a new beginning for NTPC, preparing it for the transition from 100% regulated business model to competitive bidding that will likely be implemented after FY11.

■ Key risks – Coal, competition and condition of state electricity boards. Operational performance was impacted for some of NTPC’s plants owing to low coal availability. Given constraints from Coal India (CIL) – supply CAGR a meagre ~5% – NTPC will have to ensure smooth coal supply via imports in the interim and captive production in the medium term. Further, the project accrual pace may slow down post FY11 as competitive bidding may become mandatory for PSUs. Finally, state electricity boards’ (SEBs) deteriorating health is a cause of concern for the Power sector and NTPC is not insulated from it.

■ FPO pressure behind; valuations attractive. The FPO overhang had created significant pressure on the stock. The stock has significantly underperformed the Sensex in the past one year (~50.4% YoY). We believe the current stock price offers ~18% upside with 2% dividend yield, taking the overall upside to 20%. BUY.

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