The Hindu Business Line : NTPC: Buy

INVESTORS looking for steady capital appreciation with minimal risk over the medium-to-long-term can consider putting their money in the National Thermal Power Corporation (NTPC) stock at the current market price of Rs 97. The stock has been a consistent performer since it was listed in October last; investors lucky to have got an allotment in the IPO are now sitting on returns of about 40 per cent over the allotment price of Rs 62.

NTPC's earnings growth over the next two years will be largely driven by a combination of high plant load factor (capacity utilisation) at all its coal-fired generating stations and fresh capacity addition of about 6,500 mega watts (MW) at different locations. The company has commissioned 1,000 MW of capacity this year and a further 700 MW is likely to be added by the fourth quarter.

The company had a good first quarter with revenues rising by 17 per cent and post-tax earnings growing by a handsome 24 per cent to Rs 1,309 crore. The average PLF (plant load factor) for the coal-fired stations rose to 87.31 per cent (87.13 per cent) despite the coal shortage. Of course, fuel costs went up but they were within manageable limits.

The biggest risk to our recommendation is the fuel-shortage — domestic coal supplies are short and NTPC has been forced to import up to four million tonnes of coal this year. In the near term, this is a manageable risk given that the projected shortage is only a small part of the company's annual consumption of close to 100 million tonnes of coal per annum. However, in the long-term, this is a worry because 82 per cent of NTPC's generation capacity is coal-based. Besides, the position on the remaining 18 per cent of gas-based capacity is also not too comfortable. The company's gas-based stations have been operating at sub-optimal capacity levels due to non-availability of gas. The situation has, however, improved since the beginning of this fiscal with increased supplies from the Panna-Mukta/Tapti gas fields.

To ensure fuel security, NTPC has forayed upstream into coal mining and has already secured a block in Jharkhand. Besides, it has also put in bids for oil exploration blocks offered under the New Exploration Licensing Policy V by the government. The results of its bids will be known by the end of this quarter.

The foray into oil exploration is the second risk to our recommendation. Oil exploration is a high-risk, capital-intensive business and NTPC has no competencies whatsoever in this. With the supply of gas projected to increase from various new sources, it is debatable whether NTPC needs to foray on its own into this business exposing itself to newer risks.

Of course, the company's financial position is sound. It generated about Rs 8,000 crore cash from operations in 2004-05 and this will only increase as newer capacities are commissioned. Interest costs may increase as all investments will now have to be made in a 70:30 debt:equity ratio as per regulatory norms. NTPC's revenue stream will also get a boost once the power trading and distribution businesses, to be handled by wholly-owned subsidiaries, take off.

From an overall perspective, the company appears set for an exciting growth phase ahead. Investors can consider acquiring the stock at the current price with a long-term perspective.

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