‘Buy’ on NTPC as divestment a a near-term overhang

Nov 27 2012, 10:55 IST
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SummaryThe potential stock price weakness on the back of the proposed divestment of a 9.5% stake in NTPC by the government would offer an attractive entry point in the stock.

The potential stock price weakness on the back of the proposed divestment of a 9.5% stake in NTPC by the government (targeted by March 2013 to meet its disinvestment target for FY13) would offer an attractive entry point in the stock.

In the bargain, NTPC management may persuade the government to expedite restoration of its de-allocated captive coal blocks and enable the award for its balance 4.8-GW bulk-tender projects — key requisites for sustaining fuel security and defensive earnings growth prospects for the company.

Further, if the stake sale materialises, free float in the stock would rise to 75%, which is a positive from the perspective of liquidity.

Speedy development of captive coal blocks upon restoration, imminent FSAs for post-FY09 projects and capacity addition in sync with targets would bode well for fuel security and defensive earnings growth outlook.

Building in lower levels of plant availability/utilisation and efficiency-linked gains, we lower NTPC FY13F/14F Ebitda by 8-13%; our cut in EPS is lower (Nil for FY13F, 5% for FY14F) due to a sharp rise in our forecast for non-operating income.

In our view, an effective RoE of ~20% on regulated assets seems sustainable post FY13.

Our long-term investment thesis on NTPC remains unchanged — despite a defensive earnings growth outlook, the stock remains our preferred pick among IPPs, as NTPC offers high earnings visibility, lowest funding risk, relatively adequate fuel security and a competitive cost of generation (potentially, even if coal price pooling is introduced in India).

We continue to peg our 12-month target price for NTPC on a Residual Income model.

However, we trim our perpetual RoE assumption for NTPC’s regulated assets from 18.5% to 15.5% (in line with the assured post-tax RoE up to FY14) ahead of deliberations on the FY15-19 regulatory regime by CERC (regulator) expected to be under way by 2HFY14. At its target price, the stock would trade at 1.8x FY14F P/B and 15.8x FY14F P/E.

Nomura

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