NTPC LIMITED

RESEARCH
EQUITY RESEARCH February 4, 2009

RESULTS REVIEW NTPC Limited Buy

A long-term performer
Share Data
We remain positive on NTPC’s long-term performance and its ability to
Market Cap Rs. 1,457.0 bn
Price Rs. 176.70 generate consistent returns for its shareholders. Driven by encouraging
BSE Sensex 9,201.85 revised tariff determination norms and other incentives proposed by the
Reuters NTPC.BO Central Electricity Regulatory Commission (CERC), we have increased
Bloomberg NATP IN
our target price from Rs. 195 to Rs. 221 and maintain a Buy rating for the
Avg. Volume (52 Week) 2.06 mn
52-Week High/Low Rs. 227 / 113 stock.
Shares Outstanding 8,245.5 mn The revised guidelines proposed by the CERC for the period 2009-14
are as follows:
Valuation Ratios
Year to 31 March 2009E 2010E • Higher guaranteed returns: The increase in the cap on return on
EPS (Rs.) 10.1 11.9 equity (ROE) for tariff determination from 14% to 15.5% for the next
+/- (%) 11.1% 18.4%
five years, per se, has increased our valuation for the stock by
PER (x) 17.6x 14.8x
around 10%. Moreover, an additional 0.5% ROE for commissioning
EV/ Sales (x) 3.6x 3.0x
EV/ EBITDA (x) 13.4x 10.6x projects within the scheduled timeline could further improve the
earnings of the Company.
Shareholding Pattern (%)
• Tax holiday benefit could mean higher ROE: The effective RoE
Promoters 90
FIIs 4 on new power projects of NTPC could turn out to be higher than the
Institutions 3 cap of 15.5% as the new regulations allow companies to benefit from
Public & Others 3
the 10-year tax holiday for power projects. In such a case, even
Relative Performance though the base rate RoE of 15.5% would be grossed up by the
applicable corporate tax rate, i.e. 33.9%, NTPC would only be
240
required to pay the minimum alternate tax of 11.3%, implying an
200
effective RoE of 20.8% on the new projects.
160
120
• A favourable move from PLF based incentive to availability

80 based incentive: PLF based incentives were largely dependent

Feb-08

Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
Mar-08

upon fuel supply. Thus, fuel scarcity – an external factor – used to

deprive the Company of potential incentives.
Key Figures
NTPC Rebased BSE Index Quarterly data Q3'08 Q2'09 Q3'09 QoQ% YoY%
(Figures in Rs. mn, except per share data)
Net Sales 93,308 96,614 112,771 20.9% 16.7%
Adj. EBITDA 29,691 25,476 32,086 8.1% 25.9%
Adj. Net Profit 17,798 21,105 22,509 26.5% 6.7%
Margins(%)
EBITDA 32% 26% 28%
NPM 19% 22% 20%
Per Share Data (Rs.)
Adj. EPS 2.16 2.56 2.73 26.5% 6.7%
Please see the end of the report for disclaimer and disclosures. -1-
 NTPC LIMITED
RESEARCH
EQUITY RESEARCH February 4, 2009

As per the new guidelines, incentives would now be made available on

plant availability on which the Company has greater control. We thus
believe that NTPC would benefit immensely from this change in guideline.
In Rs. Mn/MW
Particulars
2009-14 2004-09
Project Cost 45 45
Debt - 70% of Project Cost 31.5 31.5
Equity - 30% of Project Cost 13.5 13.5
Effective ROE could be much Major Components of AFC*
higher Interest on Debt @ 8% 2.5 2.5
ROE 2.1 1.9
Depreciation 2.4 2.1
O & M expenses 1.3 1.3

Total AFC 8.3 7.8

Plant Availability of NTPC (base case - %) 90% 90%

Specified Plant Availability (%) 85% 80%
Recovery of AFC 8.8 7.8
Availability based incentive 0.5 0.0
PLF based incentive 0.0 0.2
Total ROE 2.6 2.1
Effective ROE (%) 19.1% 15.5%
*AFC - Annual Fixed Cost

Long-term reinvestment opportunity intact: NTPC is suitably poised to

Investment opportunities aplenty
continuously create value for its shareholders by reaping the benefits of the
explosive growth the Indian power sector is heading to.
• XIth five-year plan on track: With 18,800 MW capacity under
construction and expected to commission by FY12, the sizable liquid
funds in NTPC’s balance sheet would soon move to greener pastures
in terms of generating returns for the shareholders. The Company
currently has a cash balance of Rs. 165 bn and GoI issued bonds
worth Rs. 134.4 bn.
• Ever-growing demand for power: Demand for electricity in India has
historically grown by 1.5-2 times the GDP growth in the country. The
GoI has ambitious capacity addition targets for the next decade to
eliminate the power deficit in the country as well as meeting the
expected increase in demand. NTPC being the largest player in the
sector is bound to benefit from this excessive demand scenario. It
plans to increase its capacity from 30 GW at present to 50 GW by
FY12.

Please see the end of the report for disclaimer and disclosures. -2-

EQUITY RESEARCH
Sales up 20.9% yoy on account
of higher fuel costs
PLFs expected to be under
pressure due to coal shortages
A strong balance sheet position
should ensure timely project
completion
Please see the end of the report for disclaimer and disclosures.
NTPC LIMITED
RESEARCH
February 4, 2009
Valuations suggest an upside: After revising our estimates according to
new CERC guidelines and incorporating the latest Company guidance, our
DCF based valuation gives a target price of Rs. 221, which implies a
potential upside of 25% from the current market price of Rs. 176.7. We
thus, maintain our Buy rating on the stock.
Result Highlights and Outlook
NTPC’s net sales for Q3’09 increased 20.9% yoy to Rs. 112.8 bn. The
increase in sales was primarily on account of higher fuel cost which is a
pass-on cost for NTPC. We estimate net sales CAGR of 17-18% over
FY08-10E for NTPC on account of capacity expansion during the period
and higher capacity charges as indicated by the new CERC guidelines.
The bottom line of the Company for Q3’09 increased 26.5% yoy led by an
increase in other income (interest on bonds and surplus cash) and a lower
tax provision compared to the same period previous year. We expect Net
Margin of the Company to decline in the coming quarters as surplus cash
would be directed towards capital work in progress, thus, implying lower
interest income for NTPC.
The PLFs for the quarter stood healthy during Q3’09. However, NTPC is
currently facing severe coal shortages for some of its plants and we thus,
expect a drop in PLFs for coal-based stations in the coming quarter.
However, PLFs for gas-based stations should improve as supply of gas
from Reliance Industries Ltd. (RIL)’s KG-D6 block is expected to
commission by February end.
With over 18,800 MW capacity under construction and expected to
commission by FY12, NTPC’s profitability is set to improve considerably in
the coming years. Moreover, the new tariff determination norms would
allow for higher potential returns to be earned by the project developers.
The stable cash generating ability of NTPC coupled with its strong balance
sheet position (capital gearing of 36%) should ensure that the projects are
completed as per schedule.
-3-
 NTPC LIMITED
RESEARCH
EQUITY RESEARCH February 4, 2009

Key Events
1,000 MW capacity begins commercial operation
Two 500 MW units – one each in Kahalgaon and Sipat began commercial
operation on December 30, 2008 and January 1, 2009, respectively.

Focusing on backward integration

NTPC signed a joint venture agreement with Steel Authority of India
Limited (SAIL), Coal India Limited (CIL), Rashtriya Ispat Nigam limited
(RINL) and National Mineral Development Corporation (NMDC) to form,
promote and incorporate a Special Purpose Vehicle, namely, International
Coal Ventures Pvt. Ltd. for securing overseas metallurgical coal and
thermal coal assets.

Valuations look attractive
Valuation
NTPC’s stock is currently trading at a forward P/E of 17.6x and 14.8x for
FY09E and FY10E, respectively. For our DCF based valuation we have
assumed a 14% cap on ROE from 2015 onwards, a WACC of 11.6% and a
terminal growth rate of 5%. Based on these assumptions we have arrived
at a target price of Rs. 221, which implies a potential upside of 25% from
the CMP of Rs. 176.7. We thus, reiterate our Buy rating for the Company’s
stock.

Key Figures
Year to March FY06 FY07 FY08 FY09E FY10E CAGR (%)
(Figures in Rs. mn, except per share data) (FY08-10E)
Net Sales 275,478 338,392 386,350 445,374 532,677 17.4%
EBITDA 81,538 101,731 117,362 119,875 152,267 13.9%
Net Profit 58,408 68,983 74,699 83,007 98,243 14.7%
Margins(%)
EBITDA 30% 30% 30% 27% 29%
NPM 21% 20% 19% 19% 18%
Per Share Data (Rs.)
Normalised EPS 7.08 8.37 9.06 10.07 11.91 14.7%
PER (x) 24.9x 21.1x 19.5x 17.6x 14.8x

Please see the end of the report for disclaimer and disclosures. -4-
 NTPC LIMITED
RESEARCH
EQUITY RESEARCH February 4, 2009

Sensitivity Analysis
WACC
221.5 10.6% 11.1% 11.6% 12.1% 12.6%
4.0% 236 214 194 178 163
Terminal 4.5% 255 229 207 188 172
Growth 5.0% 276 246 221 200 182
Rate 5.5% 302 267 238 214 194
6.0% 333 292 258 231 208

Please see the end of the report for disclaimer and disclosures. -5-
 NTPC LIMITED
RESEARCH
EQUITY RESEARCH February 4, 2009

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