NTPC: HOLD. Lots of watts in it

Recouping the losses made after an adverse change in tariff regulations last February, the stock of NTPC has gained 40 per cent since our ‘buy’ recommendation in March 2014. Long-term investors can continue to hold on to the stock.

At ₹159, the NTPC stock now trades at about 13 times its estimated earnings for 2015-16. This may appear attractive given the stock’s historical valuation band of 10-19 times. But earlier, the company was entitled to higher returns under the Central Electricity Regulatory Commission (CERC) tariff norms. Under the new tariff regime, the current valuation may be reasonable and not low.

A change in tariff regulations which came into effect from April 2014 has impacted the company’s revenues during the nine months ended December 2014. In the future too, the company is expected to earn relatively lower returns than in the past, on two counts. One, the new regulations mandate the use of the actual tax rate instead of the higher corporate tax rate for grossing up the pre-tax return on equity of 15.5 per cent allowed to the company.

Two, unlike before, when the company would earn the production-linked incentive (50 paise a unit) on the basis of plant availability, it is now based on actual power generation (plant load factor or PLF).

During the June, September and December 2014 quarters, the average PLF for NPTC was lower than the 85 per cent required (plant-wise) to be eligible to earn the incentive. But this can change over time. Given that NTPC is among the lowest-cost power producers in the country, higher demand from State distribution utilities, as their financial condition improves, could translate into higher PLFs.

NTPC is adding to its generation capacity and this should improve earnings despite the changed tariff regulations. With the recent commissioning of a unit of the Barh Thermal Power Project in Bihar, the installed capacity of NTPC (including joint ventures) has gone up to 43,803 MW, up 785 MW from a year ago.

While this addition has been at a slower rate compared with the 1,780 MW added during 2013-14, NTPC, as on date, has 21,600 MW capacity projects under various stages of implementation.

Besides, it is also looking at acquiring existing power plants from private producers and State electricity boards.

With cash reserves of ₹17,000 crore as on March 2014, it is well placed to carry out such acquisitions. The company’s recent move to issue bonus debentures, rather than paying dividend, will help conserve cash for expansion.

There are other factors too in favour of NTPC that should provide comfort to investors. Unlike many other power producers, NTPC’s debt-to-equity ratio of 0.8 times (1.1 times after the bonus debenture issue) is low.

Also, even though its incentives have been reduced, the company still enjoys tariffs that ensure a complete pass-through of costs plus an assured pre-tax return on equity of 15.5 per cent. It has secure fuel supply with 90 per cent of its coal requirement being met from Coal India. The rest of the coal demand is met from imports.

Following last year’s cancellation of coal blocks by the Supreme Court, NTPC is left with five captive blocks with estimated reserves of 2.5 billion tonnes, of which the Pakri-Barwadi block (reserves of 1.4 billion tonnes) is expected to commence production in 2015-16.

NTPC is confident that its cancelled coal blocks, which figure in the Ministry of Coal’s list of blocks to be allocated to a government company (post de-allocation), will be allotted in its favour.

For the nine months ended December 2014, NTPC’s net profit of ₹7,347 crore was down 6.8 per cent from the year-ago period.

The slip in operational performance dented profit at the net level. Operating profit (EBITDA) fell 13.7 per cent during this period.

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