NTPC stock's performance puzzles market

Analysts feel while fuel issues have plagued the sector, NTPC is better off and is on track to achieve 12th Plan capacity addition target

Fuel risk is a widely known issue in the power generation sector now. Besides, concerns over its pricing and now quality of coal (supplied by Coal India Ltd, or CIL), shortage of gas (thanks to declining output at Reliance Industries’ KG-basin) have only added fuel to the fire.

NTPC though, stands out from its peers, as the company has coal linkages for most of its capacity (90 per cent). In addition to this, the company’s two coal mines (Pakri-Barwadih; out of eight awarded) are also expected to start commercial operations in FY14, which will partly take care of incremental fuel requirement.

Further, gas-based plants form just around 10 per cent of its total installed capacity (41,000 Mw). Notably, NTPC is also on track to meet its capacity addition target of 14,000 Mw for the 12th Plan, which indicates revenue visibility. In this light and given the cheap valuations, many analysts are positive on the stock and believe its underperformance trend will change for the better.

In a recent note, Morgan Stanley analysts say, “We continue to like NTPC’s regulated business model (in an environment where IPPs are making losses), strong balance sheet (relative to significant leverage for most IPPs) and long-term visibility on growth (IPPs have stopped announcing new projects thus stunting future growth opportunities).” They add NTPC trades at 1.3 times 12-month forward price/book (P/B) and have maintained their overweight rating on the stock. On April 9, Credit Suisse analysts upgraded NTPC’s stock.

Rahul Modi, analyst, Antique Stock Broking maintains ‘a ‘Buy’ recommendation on the stock in his report dated March 15. “We believe NTPC is best placed to tide over the fuel shortage situation in the country amidst all the generators due to the cost plus model and fixed cost recovery on plant availability,” he points out.

The company’s coal requirement in the 12th Plan is expected to rise from 164 million tonnes (mt) in FY13 (estimated) to 218 mt by FY17. While supply from CIL will continue to form a major chunk (72-80 per cent) of the requirements and imports will be compulsory (5-12 per cent), production from captive mines is expected to touch 37 mt in FY17 from zero in FY13, which is a positive. With captive mines starting operations this fiscal, NTPC is expected to be supplied three to four mt of coal in FY14.

On the other hand, in the past few years, NTPC has not been able to achieve its capacity addition target, which has been a perennial concern and led to de-rating of the stock. However, on this front also, NTPC scores over its peers. Analysts are confident of the company achieving its capacity addition target of about 14,000 Mw for the 12th plan (FY12-17) — average annual run-rate of 2,800 Mw. For FY13, compared to the target addition of 4,170 Mw, the company has already commissioned 3,160 Mw. A bigger positive is that funding for these projects is in place and capacity addition will be mostly front-ended, which implies higher earnings visibility or improved financial performance. Notably, NTPC has already entered into long-term coal sourcing agreements for 10,000 Mw of the 12th Plan capacity, say analysts.

Despite this edge over its peers and the good response to the offer for sale by the government (oversubscribed 1.7 times) in February, the stock remains undervalued. This is largely due to sector-related issues. At Rs 141, the stock’s valuation at 10.5 times and 1.4 times FY14 estimated earnings and book value, respectively, is cheap compared to its historical band and also its peers. Analysts believe a fair price to book multiple would be 1.75 times for FY14. And, the stock’s underperformance reflects the negatives like delays in capacity addition and muted earnings growth in the past. Thus, many of them have upgraded it recently.

Says Lavina Quadros, analyst, Jefferies, in her report dated March 25, “With NTPC on track to achieving its capacity addition target, regulated earnings model lending earnings certainty and eight-year high dividend yield of 3.3 per cent protecting downside, we upgrade it from ‘Underperform’ to ‘Hold’. Earnings are expected to grow and not decline. We see limited downside risk to our earnings expectations.”