Analysis: A good time to look at NTPC

NTPC is best positioned among its peers in terms of fuel availability and depends only up to 10% of its total requirement on imported coal

After its initial public offer in 2004 followed by a follow-on offer in 2009, the Finance Ministry is proposing to disinvest a further 9.5% stake in India's largest power producer, National Thermal Power Corporation (NTPC), according to media reports, though the management has denied any such development.

However, if the disinvestment indeed happens, it will fetch the cash-strapped government roughly Rs 13, 000 crore or close to 45% of total disinvestment target of Rs 30,000 crore in FY13. Given the woes of the power sector and NTPC's relatively better position among peers from fuel availability perspective, it won’t be tough to raise the funds.

NTPC is best positioned among its peers in terms of domestic fuel availability and depends only up to 10% of its total FY13 requirement of 164 million tonne (MT) in FY13 on more expensive imported coal, if it operates at 90% plant load factor. Of the 16 MT to be imported, 9 MT has already been tied up and the rest is expected to be arranged shortly. Additionally, the company's first captive mine (total 3 billion tonnes of reserves in six mines) is expected to be ready for commissioning by 2012-end.

With 99% of its power sold to state electricity boards, there is little risk of demand dropping. Moreover, due to long term fuel supply agreements and low proportion of coal imports, its production cost is cheaper than others.

Though the company has fallen short of its capacity addition targets in the past, it is trying to improve on that too. Of the total target of adding 4,160mw in FY13, it has already added half of it so far. But this has to happen consistently and investors should keep monitoring it.

Lastly, there is low dilution risk as funds have already been tied up for projects under construction (14,038 mw in 12th Plan). Additional debt will also not put much burden given that its net debt to equity is just 0.5 times and the company has strong cash flows.

Venkatesh Balasubramaniam, analyst, Citi Research makes an interesting comment on the company in his August 31 report. Says he, "Investors have questioned NTPC's ability to compete with private independent power producers, given that it did not win any competitive ultra mega power project bids. It is now fairly established that NTPC saw the impending inflationary risks of fuel price and capital costs and chose to make reasonable bids. While NTPC continues to work on adding 14,000mw capacity in the 12th Plan (based on assured return on equity model), most private IPPs are making a beeline with CERC pleading for tariff hikes in PPAs which do not allow such increases post the bid.”

All these positives have already been reflected on the stock's outperformance vs the Sensex and BSE Power Index in last three months. Despite that, valuation at 1.6 times price to book value and 13.5 times price to earnings multiple (estimated for FY14) is reasonable given average 2.2 times and 17 times one year forward historical multiple. Significant upside is possible if pricing is done around the current levels.