Sunday, June 7, 2009


Losing Steam

NTPC, India’s largest power producer is facing huge delays in most of the plants under construction. Delays in capacity addition resulting in lower rate of return on core business, coupled with rich valuations of 3.1xFY10E BV and 25X FY10E EPS makes the stock richly valued. In addition, the free-float adjustment in Nifty is expected to bring down the stock weightage in the index by around 550 bps is a key negative for NTPC. We believe that the above market valuations and slow earnings growth do not justify the current price. We initiate coverage on NTPC with a SELL rating.

Key Highlights

Delayed execution: Of the 22,430 MW (inc. JVs) power generation capacity targeted to be added during 11th five year plan ending 2012, only 3,740 MW has been commercialized. Of the 17,430 MW under construction, we expect NTPC to commission only 9,560 MW by FY12. Poor execution resulting in idle CWIP earning zero returns and inefficient utilization of cash generated through operations is expected to suppress NTPC’s ROE.

Rich valuations overweigh tariff regulations gains: Though, the new tariff regulations are positive for NTPC, the current valuations more than overweigh the gains from new tariff regulations.

Reduced weightage in Nifty: From June 26th 2009, NSE is expected to move to free-float market capitalization basis from the current method of full market capitalization basis for the index constituents. NTPC, with free float of only 10.5%, will be severely impacted with a 550bps fall in weightage in the Nifty.

Valuation: We ascribe 1-year forward value of Rs161 per share to NTPC‘s generation business based on DCF approach and Rs16 per share for equity investments and cash & cash equivalents to arrive at our 1-year forward target price of Rs177 per share. At current market prices Rs229, NTPC is trading at 3.1xFY10E BV of Rs74.3 and 25XFY10E EPS of Rs9.1, a steep premium to the market valuations. We initiate coverage with a SELL.

To see full report: NTPC