NTPC: Powering ahead

Reasonably priced FPO is for investors seeking long-term gains.

NTPC has fixed the floor price for its follow-on-public offer (FPO) at Rs 201, 4.3 per cent lower than its yesterday’s close. The government aims to divest 5 per cent in the company to reduce its stake to 84.5 per cent.

NTPC is planning an additional capacity of 8,000 Mw by 2011-12 and will thereafter add 6,000 Mw every year till 2016-17, which will more than double its capacity to 75,000 Mw.

NTPC also plans to reduce its exposure to coal-based plants by diversifying into gas, hydro, nuclear and renewable energy.

New capacities will be funded primarily from internal accruals as it generates around Rs 10,000 crore annually from existing operations. Additionally, it has investments worth Rs 13,800 crore on its balance sheet, which can easily take care of its expansion plans.

Analysts expect revenue to grow 20 per cent and profits to increase 16-18 per cent over the next two years. However, this does not include plans to set up merchant power capacity. In addition, it may sell some of its existing capacity on a merchant basis, for which it is seeking approvals.

Any favourable development on these fronts may boost profits as merchant power will yield Rs 4-5 per unit, as against the regulated tariff of Rs 1.8-2 per unit. This may help return on equity rise by 250-300 basis points (bps), leading to higher profitability.

At the floor price of Rs 201, the issue is valued at 2.6x its book value, which is reasonable compared to its private sector peers, which are trading at about 2.8-3x, say analysts. On price to earnings, it is fairly priced at 16.7x FY11 earnings and 14.3x FY12 estimated earnings.

Seeing NTPC’s size and execution capabilities, along with its strong cash flow, analysts believe it can be a good long-term investment and a direct play on the opportunities present in the power sector.