1. HSBC rates NTPC as ‘Buy’ as Q1 income grew 16%

HSBC rates NTPC as ‘Buy’ as Q1 income grew 16%

Q1 saw adjusted net income grow 16% y-o-y, driven by 11% increase in generation

By: | Published: August 27, 2016 6:00 AM
Reported net income was up c4% y-o-y. Commercial standalone capacity increased c1.2% q-o-q (c6.5% y-o-y) as NTPC commissioned the 250MW Bongaigaon power project and a 200MW Solar power plant in Andhra Pradesh. (Source:Reuters) Reported net income was up c4% y-o-y. Commercial standalone capacity increased c1.2% q-o-q (c6.5% y-o-y) as NTPC commissioned the 250MW Bongaigaon power project and a 200MW Solar power plant in Andhra Pradesh. (Source:Reuters)

In its Q1FY17 results, NTPC reported adjusted comparable net income of R24.7 bn, up c16% y-o-y (adjustments made on account of tax write-back in Q1FY16). Reported net income was up c4% y-o-y. Commercial standalone capacity increased c1.2% q-o-q (c6.5% y-o-y) as NTPC commissioned the 250MW Bongaigaon power project and a 200MW Solar power plant in Andhra Pradesh. Regulated equity increased to R420 bn, up c17% y-o-y and c1.4% on a q-o-q basis.

Conference call highlights

w GCV issue: Having lost the CERC petition on the issue of measuring the GCV of coal received at secondary crushers vs the unloading point, NTPC mentioned that while the petition continues in the High Court, it is taking measures to comply with the CERC regulation.

w Variable charge and coal usage: Variable charge increased by c6% y-o-y, which

NTPC attributed to domestic coal price increase and increase in clean energy cess. Coal consumption on per kWh basis also fell by c6% in Q1FY17 compared to FY16 average; NTPC attributed that to the higher quality of the domestic coal supplies.

w Commissioning targets maintained: NTPC mentioned that it intends to commission c3.7GWs of new projects in FY17e, and c5.0GWs in FY18e; which is broadly in line with what we have built in our model.

We remain buy on NTPC with an unchanged target price of R175. We are not making changes to our estimates in this report as Q1FY17 results were broadly in line with our estimates. We had noted in our report on 19th May that should the UDAY scheme find success, the oversupplied and under-utilised generation segment will likely see the largest returns. However, while the jury is still out, we continue to advise staying invested in central utilities. Since then, power demand has increased materially, being reflected in strong results by NTPC.

NTPC (NTPC IN, Buy)

We value NTPC’s core FY18e (unchanged) regulated equity at a justified PB of 2.0x (unchanged). We value the equity invested in new projects and cash at 1x PB (unchanged). We discount the valuation back one year to derive our fair value target price. Our target price implies c6.9% upside.

Key downside risk

Delay in execution: As we highlighted earlier, sums invested in projects not declared commercially operational do not yield any returns for NTPC. The future net income growth that we predict for NTPC is dependent on our estimates of capacity commissioning. Although we have built some delays into our earnings model, any further delays would impact our estimates of NTPC’s net income.

Regulatory risk: NTPC derives almost all its net income based on regulated returns. Any unexpected change in regulations could impair NTPC’s net income for the next few years.

Significant capital spending can be EVA negative: NTPC is investing significant sums in creating capacity. As it stands today, a significant power capacity in India is lying idle and generating sub-optimal return ratios. Given the long gestation period of thermal projects, NTPC has to plan as well as commit funds much ahead of actual demand picking up. Delay or absence of demand can impair NTPC’s ability to generate future income.

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