NTPC: Safe and steady

The stock of NTPC has lost 11 per cent since our ‘hold’ recommendation in March 2015. A disappointing performance in 2014-15 following a change in tariff regulations that reduced the company’s returns was a dampener. In the June 2015 quarter too, a fall in electricity generation due to lower demand hurt performance — revenue declined 7 per cent year-on-year and net profit dipped 3 per cent. The new regulations which came into effect from April 2014, 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. Also, unlike earlier, when NTPC would earn production-linked incentive on the basis of plant availability, it is now based on actual power generation.

A good show by the company in the September quarter however buoyed the stock, which has gained 10 per cent since then. Higher power generation after the commissioning of the Koldam Hydro Power Project in Himachal Pradesh helped the company improve its revenue 7 per cent and net profit 40 per cent year-on-year.

Despite the recent uptrend, at ₹136, the stock trades at 10.6 times its trailing 12-month earnings, below its five-year average valuation of over 13 times. Investors with a long-term perspective can buy the stock. Despite stricter tariff regulations for 2014-2019, the company’s prospects look good thanks to big expansion plans.

NTPC is expanding its generation capacity and this should help grow earnings despite the new stricter tariff regulations. At 4,443 MW, the company’ power generation capacity as on October-end 2015 was 6 per cent more than that a year ago.

With the commissioning of a 500 MW unit at the Vindhyachal Super Thermal Power Station in October, NTPC has achieved close to half its targeted capacity addition for 2015-16. Of the currently under-construction capacity of 23,000 MW, the company plans to commission 5,350 MW in 2016-17 and another 8,050 MW in 2017-18. NTPC is also looking at acquiring state-owned thermal power stations. With cash reserves of ₹14,500 crore as on March 2015, it is well placed to undertake such acquisitions.

Also, while NTPC’s returns have been reduced under the new regulations that will be applicable during 2014-19, its projects continue to enjoy tariffs that enable a complete pass-through of costs plus an assured pre-tax return on equity of 15.5 per cent.

The company is well-placed on the raw material front too. It has a secure fuel supply with about 90 per cent of its coal requirement being met from Coal India and the rest from imports. Increasing production by Coal India too provides comfort.

Apart from that, NTPC also has captive mines with an estimated production capacity of 93 million tonnes per annum. The company’s Pakri-Barwadih mine is expected to commence production (1 million tonne) this year. The industrial sector accounts for a chunk of the country’s electricity demand. Hurt by the Chennai floods, the Index for Industrial Production (IIP) contracted 3.2 per cent in November, but an expected pick-up in industrial growth should help. During April-November 2015, the IIP expanded 3.9 per cent, up from 2.5 per cent in the same period a year-ago.

Higher demand from State distribution utilities, when their financial condition improves, too could give a push to electricity demand.

NTPC currently has a solar power capacity of 110 MW and it plans to scale this up by 3,000 MW by 2019. While the company’s foray into solar power generation appears risky, the government’s nod for bundling the company’s thermal and solar power for sale provides comfort.

NTPC has been allowed to bundle its costlier solar power with the cheap thermal power from its over 25-year old coal-based plants and selling the two at a bundled rate. With this rate likely to be lower than that at which power can be supplied by many other power companies, this should provide a market for the company’s solar power.