We expect NTPC?s capacity addition to accelerate, with 17.5 GW of projects under construction getting commissioned over FY11-14. As in March 2010, NTPC has already spent 31% of the total cost on these projects. The spent is likely to increase to 47% by the end of FY11.
We estimate NTPC?s capacity addition in the Eleventh Plan at 9.8 GW?a significant underachievement, given the original target of 22.4GW. As a large part of these projects has been under construction from 2007, we expect bunching up of project commissioning, going forward. FY11BE (Budget estimate) capex for NTPC stands at Rs 224 billion and is up 120%, indicating that activities on the ground have started improving.
Fuel supply a challenge: Fuel availability has been a contentious issue for the Indian power sector, which is largely dependent on linkages from Coal India (CIL). Over FY07-10, NTPC has consistently maintained PLF of 90%+ despite the addition of about 7.5GW capacity over the period. This is a result of proactive steps taken by the management, including coal imports and spot purchases of LNG.
NTPC has signed an FSA (fuel supply agreement) with CIL for 90% of the required quantity of coal for 12 of its 15 stations. The share of imported coal is likely to increase to about 15% of its fuel consumption basket in FY11 (up from 3% in FY07). LNG imports constituted 24% of gas consumption in FY10. Production from NTPC?s captive coal block would to commence in FY12 and constitute about 16% of its total fuel consumption by FY17. NTPC has access to 4.8 billion tonnes of coal reserves, with a production potential of 53 million tonnes per annum from own blocks and 20 mtpa from blocks held through the joint venture with CIL.
Incentives aid core profitability: Incentives contribute 35-40% of NTPC?s total generation profits, leading to higher core RoE (return on equity). While we expect the contribution of incentives to sustain, the composition would change with the addition of new streams like merchant profit, gain on mining business, etc. Also, given that a large part of the capacity additions by NTPC is brownfield, we expect Man/MW ratio to decline meaningfully, as capacity addition accelerates, leading to higher O&M (operation & maintenance) incentives. We expect NTPC to deliver net earnings CAGR (compound annual growth rate) of 14% over FY10-14, led by 23% CAGR in core generation profits.
Valuation and view: We arrive at a target price of Rs 240 (upside of 20%), based on a combination of DCF (discounted cash flow) and SOTP (sum-of-the-parts) valuation methodologies. We upgrade the stock to Buy given the following: (i) valuations are near the long-term average; possibility of re-rating with improved visibility of about 16GW capacity addition over FY11-14; (ii) project award of 15-16GW likely over the next 18 months, which will improve growth option visibility beyond FY13/14; and (iii) significant underperformance as compared to the broader indices. Risk to our call include: (i) further meaningful delays in capacity commissioning / project awards, and (ii) rising G-sec yields (NTPC?s stock performance is inversely correlated to G-sec yield movement).
Capacity addition to accelerate: By the end of FY11, we expect 50-85% of the project capex to be spent on 8 GW of projects, while 35-50% of total project cost would be spent on an additional 3.4GW (totaling to 65% of the 17.5 GW capacity under construction). This provides visibility on capacity addition for NTPC, beginning FY11.