NTPC had its worst Q2 with PAT (profit after tax) falling 8% year-on-year, led by lower (15.5%) power RoE (return on equity), because of grossing-up of tax at MAT (minimum alternate tax) rate vs peak rate (18.6%) in FY10, delay in capex by its Russian vendors, 390 bps fall in yield on its treasury of Rs 192 bn and higher O&M (operation and maintenance) costs.
Generation was +6% year-on-year on +3% YoY capacity add. We maintain the Underperform rating despite 26% stock underperformance in last one year due to (i) continued delay in capex led by its Russian suppliers (31% of capex) impacting PAT/RoE growth, (ii) risk of tax gross-up MAT hit and (iii) expensive valuation?P/BV (price-to-book value) at 2.5x (times) FY11e, highest among the regulated utility in Asia.
NTPC missed FY10 parent capex 43% by value and 70% by MW to start 990 MW vs plan to add 3300 MW on its stand-off with its Russian suppliers at two of its largest projects, namely, Sipat-I and Barh-I totalling to 3.9 GW. This delay has started impacting its secular growth from Q1FY11.
Core arguments: (i) Potential delay in capex impacting PAT/RoE growth; (ii) closure of the MoU window to win project as India moves to competitive bidding regime; and (iii) expensive valuations. Benefits from regulatory policy seem priced in and potential risks could cap stock returns here on.Delay in capex and competition are negative catalysts, while a pick-up in capex and higher than 15.5% RoE on gross-up of tax at peak rate/coal capex would be a positive.