Fresh investments with a three-year perspective can be considered in the stock of NTPC, the largest power generating company in India. The NTPC stock is a defensive play in the power space, given that the tariffs are linked to costs with definitive offtake. This provides clarity on the cash-flows at a time when there is uncertainty associated with earnings of Indian corporates.
At the current price of Rs 172, the stock trades at 1.74 times its estimated FY13 price-book value and 13.7 times its estimated earnings. The stock's premium may be warranted by its low leverage and strong internal accruals to support future expansion. The dividend yield on the stock is two per cent.
A regulated tariff model with no exposure to merchant tariffs, fuel security and high internal accruals, which are sufficient to fund equity investment of future projects, are key reasons to invest in the stock. The company has signed power purchase agreements (PPAs) for 1,00,000 MW amounting to three times the current installed capacity.
The frail health of State electricity boards (SEB) has not impacted NTPC to a large extent, given that it has the first right on the receivables of SEBs.
While the stock under-performed the market over the last two years on concerns of execution delays (which put pressure on return ratios), the valuations now seem attractive. Even assuming that all projects guided by it will be commissioned this fiscal, NTPC would miss the initial 11th Plan target by 50 per cent.
It has been observed by the Power Ministry that the competitive bidding tariffs of private players in majority cases have been lower than the cost-plus tariffs. This implies that the return on equity on NTPC's projects may be superior to that of projects bid through competitive bidding route putting it at an advantage.
Capacity addition
The installed capacity of NTPC, as of June 2011, stood at 34,854 MW. Given that close to 3660 MW capacity is expected to be added during the current fiscal and projects with capacity of 10,000 MW is under construction, power generation may grow in double-digits over the next three-four years. Conclusion of bidding for NTPC's tender for super-critical boiler turbine generator (13,140 MW) would add clarity on the long-term projects. NTPC plans to have 90 per cent of its capacity in the 12th Plan (2013-2017) using efficient supercritical technology.
As more capacities go on stream (without further delays), the capital work in progress will translate into operational assets which would improve the depressed return on net worth. Return on net worth stood at a dismal 14 per cent at the consolidated level in 2010-11. The fall in one-time settlement bonds issued by SEBs (tax free bonds) and utilisation of cash (Rs 16,185 crore) for upcoming projects would further improve the returns of the company.
Near-term concerns remain
Near-term concerns persist as the SEBs are backing off from drawing excess power from NTPC's plants. Also, a good monsoon has improved hydel power availability. NTPC's power generation is down 1.8 per cent year-on-year up to August this fiscal despite adding capacities over the last one year. Therefore, any improvement in earnings would be due to the improved realisations rather than expanding capacities.
However, SEBs are planning to raise the power tariffs which would improve their financial standing. Recently, NTPC has been allowed to sell surplus power to other SEBs if the home state (where the project is set up) doesn't want to purchase power from NTPC. The power purchase will be at regulated price. The average tariff of NTPC for the quarter ended June 2011 was Rs 2.77 per unit, higher than Rs 2.63 per unit last fiscal.
Fuel security
While fuel is the biggest risk facing private power producers today, NTPC is in a sweet spot on this count. It signed a 20-year fuel supply agreement for 13 of the 15 operational coal projects with Coal India in March 2009. This ensures 90 per cent coal supply with a penalty clause. For other projects as well, NTPC obtained coal linkages from the Coal Ministry. Additionally, NTPC plans to import as much as 15 million tonne (up from 10.6 million tonne in 2011) this fiscal. NTPC is making sure that the coal is available at all its projects even if there are lower dispatches from Coal India so that it can maintain its Plant Availability Factor (PAF). High PAF would ensure generation-based incentives for power projects.
For future projects, Coal Ministry has stated that priority for coal allotment would be to projects which have signed long-term PPAs, over merchant projects. On captive coal blocks, the Coal Ministry has cancelled blocks allotted to NTPC but the Ministry of Power and NTPC are trying hard to get back these blocks.
Management expects that coal production from captive blocks would begin from 2013. It aims to ramp up production to 47 million tonnes per annum by FY17.
Leverage
NTPC continues to have low leverage (0.74 times at consolidated level) and interest costs, which may go down well with investors. The average cost of borrowing for NTPC was low at 7.3 per cent for the year ended March 2011. While the rates may go up, given the interest rate component is pass-through, the impact will be low. With Rs 16,100 crore of cash in hand, it can build another 11,300 MW of capacity. Operating cash flows from projects can comfortably take care of future capacity additions.