Selloff an overhang

Stake divestment to pressure stock; mines are long-term. We see government divestment of its 9.5% stake in NTPC as a potential stock overhang given the weak execution at NTPC, its rich valuation and that re-allocation of three coal-mines is only a long-term catalyst at best.

A potential hike in the float to 25% (15.5%) could pressure the shares and has been one reason for our Underperform rating. The government is working to hike LIC's investment limit to 30% vs 10% as LIC, which bought most of the qualified institutional placement (QIP) in NTPC’s last follow-on public offer (FPO) already owns over 6%.

The NTPC stock has underperformed the market by 18% YTD (year-to-date) despite it being a consensus Buy (55% brokers).

We reiterate our non-consensus Underperform (13% brokers), as its slow growth (9% till '17e) on poor execution may de-rate its expensive regulated utility multiples (1.6x P/BV—price-to-book value) esp. given that a peaked FY14e (estimates) RoE (return on equity) of 13.8%, negative FCF (free cash flow) and lower yield (3% vs SJVN's 5%), could cap upside apart from government divestment.

Govt to divest 9.5% stake; Will mine catalyst work? NTPC’s last FPO in Feb’10 was subscribed by LIC, which bought 50% of the offer (2.5% of 5% offered) i.e. the entire QIB portion at R209/share (vs floor at R201). Post-FPO, LIC sold 39% in one month. The stock is now trading at 22% below the LIC FPO bid

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