CRISIL Research Ier Report Ntpc 2011

8/6/2019 CRISIL Research Ier Report Ntpc 2011

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CRISIL Limited. All Rights Reserved.

NTPC Ltd

Enhancing investment decisions

Detailed report


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Explanation of CRISIL Fundamental and Valuation (CFV) matrix

The CFV Matrix (CRISIL Fundamental and Valuation Matrix) addresses the two important analysis of an investment making process

Analysis of Fundamentals (addressed through Fundamental Grade) and Analysis of Returns (Valuation Grade) The fundamental

grade is assigned on a five-point scale from grade 5 (indicating Excellent fundamentals) to grade 1 (Poor fundamentals) The

valuation grade is assigned on a five-point scale from grade 5 (indicating strong upside from the current market price (CMP)) to

grade 1 (strong downside from the CMP).

CRISIL

Fundamental Grade

Assessment CRISIL

Valuation Grade

Assessment

5/5 Excellent fundamentals 5/5 Strong upside (>25% from CMP)

4/5 Superior fundamentals 4/5 Upside (10-25% from CMP)

3/5 Good fundamentals 3/5 Align (+-10% from CMP)

2/5 Moderate fundamentals 2/5 Downside (negative 10-25% from CMP)

1/5 Poor fundamentals 1/5 Strong downside (


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CRISIL Limited. All Rights Reserved. CRISIL EQUITIES | 1

March 21 , 2011Fair Value Rs 232CMP Rs 173

Fundamental Grade 4/ 5 (Strong fundamentals)

Valuation Grade 5/ 5 (CMP has strong upside)

Industry Information technology

Polaris Software Limited Business momentum remains intact

Fundamental Grade 5/ 5 (Excellent fundamentals)

Valuation Grade 5/ 5 (CMP has strong upside)

Industry Independent power producers & utilities

NTPC LtdStanding tall

NTPC is the largest power producer in India with 28.6% share in generation.

The company has a stable business model earning fixed return on equity along

with efficiency incentives based on normative parameters. We maintain our

fundamental grade of 5/5, indicating that its fundamentals are excellent

relative to other listed securities in India.

Largest power producer in India w ith strong growth prospectsNTPC is the largest power producer in India with an installed capacity of

33,194 MW including joint ventures (JVs). NTPC has lined up significant

capacity additions in the 11th and 12th five-year plans to drive future growth.

CRISIL Equities expects NTPC and its JVs to commission 11.8 GW* by FY13.

The continued power deficit scenario in the country will help NTPC maintain

good PLF (plant load factor) on the newly added capacity.

High fuel securityWe believe NTPCs projects have relatively better fuel security due to FSAs

(fuel supply agreements) for 90% of the normative requirement for plants

commissioned before March 2009 and 70% for those commissioned after.

Further, the companys captive mines are at advance stages of development.

Pakhri Barwadih, Jharkhand is expected to commence production by end-FY12.

We expect captive mines to meet 6-7% of total coal requirement by FY16.

Stable cost-plus model: new agreements w ould ensure it continuesNTPCs power plants earn a regulated RoE of 15.5% along with efficiency

incentives for operations above normative parameters. This regulated model

provides stable earnings visibility. NTPC has signed power purchase

agreements (PPAs) for over 1 lakh MW (including existing capacity of ~33GW)

before the expiry of the January 2011 deadline, after which competitive

bidding-based tariff regime became applicable. These PPAs would ensure thecurrent cost-plus model continues during and beyond the 12th Five-Year Plan.

Expect three-year revenue CAGR of 15.0%We introduce FY13 estimates and expect revenues to grow at 15.0% CAGR to

Rs 736 bn in FY13. The end-of-plan bunching of capacity additions would drive

the revenue growth. Adjusted EPS is expected to grow slower at 10.6% CAGR

over FY10-13 due to reducing other income.

Valuations market price has strong upsideCRISIL Equities has used the discounted cash flow method to value NTPC. We

have rolled over our earnings to FY13 and arrived at a fair value of Rs 232 per

share. This fair value implies P/E multiples of 18.9x FY12E and 17.0x FY13E

earnings. We initiate coverage on NTPC with a valuation grade of 5/5,

indicating that the market price has strong upside from the current levels.

KEY FORECAST

(Rs mn) FY09 FY10 FY11E FY12E FY13E

Operating income 442,068 484,671 525,932 626,934 736,445

EBITDA 101,267 126,501 136,698 173,307 208,367

Adj Net income 67,904 82,908 86,861 101,152 112,330

Adj EPS-Rs 8.2 10.1 10.5 12.3 13.6

EPS growth (%) (16.3) 22.1 4.8 16.5 11.1

PE (x) 21.8 20.6 16.4 14.1 12.7

P/BV (x) 2.6 2.7 2.1 1.9 1.8

RoCE (%) 8.5 9.6 9.3 10.6 11.2

RoE (%)12.3 13.8 13.3 14.3 14.6

EV/EBITDA (x) 16.8 15.6 13.1 10.8 9.5

S o u r c e : C o m p a n y , CR I S I L E q u i t i e s e s t i m a t e

CMP: Current Market Price * 1 GW = 1000 MW

CFV MATRIX

KEY STOCK STATI STICSNIFTY/SENSEX 5365/17839

NSE/BSE ticker NTPC

Face value (Rs per share) 10

Shares outstanding (mn) 8,246

Market cap (Rs bn)/(US$ bn) 1,426/33

Enterprise value (Rs bn)/(US$ bn) 1,784/43

52-week range (Rs) (H/L) 222/168

Beta 0.84

Free float (%) 15.5%

Avg daily volumes (30-days) 1,648,005Avg daily value (30-days) (Rs mn) 290

SHAREHOLDING PATTERN

PERFORMANCE VIS--VIS MARKET

Returns

1-m 3-m 6-m 12-mNTPC -3.4% -9.9% -16.9% -14.1%

NIFTY -1.7% -10.6% -10.7% 2.3%

ANALYTICAL CONTACTChetan Majithia (Head) [email protected]

Onkar Kulkarni [email protected]

Vishal Rampuria [email protected]

Client servicing desk

+91 22 3342 3561 [email protected]

1 2 3 4 5

1

2

3

4

5

Valuation Grade

FundamentalGrade

Poor

Fundamentals

Excellent

Fundamentals

Strong

Dow

nside

Strong

Up

side

84.5% 84.5% 84.5% 84.5%

3.4% 2.9% 2.6% 2.6%

8.4% 8.8% 9.1% 9.1%

3.7% 3.8% 3.9% 3.9%

60.0%

70.0%

80.0%

90.0%

100.0%

Dec-10 Sep-10 Jun-10 Mar-10

Promoter FII DII Others


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NTPC Ltd

Table: 1 NTPC: Business environment

Product / segment Pow er generation

Revenue contribution ( FY10) 98.4% (remaining from consultancy services)

Revenue contribution ( FY13) 98.4% (remaining from consultancy services)

Product / service offering Generation and bulk power sale to SEBs

Geographic presence Generation facilities are located across IndiaMarket position Largest power producer in India accounting for 18% of Indias installed capacity

and 28.6% of generation

Industry growth e xpectations Demand for power expected to grow at 7.8% CAGR over FY10-15

Sales grow th(FY07-FY10 3-yr CAGR)

12.6%

Sales forecast(FY10-FY13 3-yr CAGR)

15.0%

Demand drivers Robust GDP growth of 8-8.5% for next five years combined with improvedavailability of power is expected to drive demand for power at 7.8% CAGR

Latent demand of power to be unleashed due to improved availability,penetration of power infrastructure, electrification of villages, etc.

Though power deficit is expected to moderate to 4.8% by FY15, India wouldcontinue to be power starved

Key competitors & competitive landscape With the advent of competitive bidding-based sourcing of power by SEBs fromJanuary 2011 onwards, NTPC would be competing against all the central and

state utilities along with private developers for new projects

Due to signing of PPAs with SEBs before the deadline, NTPC has secured astrong project pipeline that will last it beyond the 12th Plan, thereby

postponing direct competition from other players

Key risks Reduction in regulatory returns post revision in FY14 While NTPC is insulated from fuel price risk, availability of fuel would impact

the PAFs (plant availability factor) and related incentives

Delays in executionS o u r c e : Co m p a n y , C R I S I L E q u i t i e s


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NTPC Ltd

Grading RationaleStrong growth prospects

NTPC is Indias largest power producer with an installed capacity of 33,194 MW

(of which 3,364 MW is through JVs and subsidiaries) as of December 2010. In

addition it has recently synchronised 500 MW unit at Farakka (March 7, 2011) and

660 MW supercritical unit at Sipat (February 18, 2011). The company operates in

a regulated environment wherein it earns a fixed RoE for the projects and all the

costs are passed through in tariffs. In such a business model, growth is primarily

driven by capacity additions.

CRISIL Equities estimates that NTPC would add around 11.8 GW of capacity over

FY10-13 including 3.8 GW through its subsidiaries and JVs. As a result, we expect

commercial generation (including NTPCs proportionate share in JVs) to grow at

9.7% CAGR over FY10-13 as against 5.9% over FY07-10.

Table 2: Capacity addi tionsFY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E FY14E FY15E FY16E FY17E

Coal based 500 2,415 1,000 500 990 1,650 2,820 2,750 3,980 1,980 2,780 3,200

Gas based - - - - - - - - - - - -

Hydro based - - - - - - - 730 590 - - -

Standalone 500 2,415 1,000 500 990 1,650 2,820 3,480 4,570 1,920 2,780 3,200JV 740 - 990 250 460 500 2,000 500 - 1,320 1,980 -

Subsidiaries - - - - 110 - - 880 500 - - -

JV & Sub 740 - 990 250 570 500 2,000 1,380 500 1,320 1,980 -Consolidated 1,240 2,415 1,990 750 1,560 2,150 4,820 4,860 5,070 3,300 4,760 3,200

Estimates are based on commercial operation dates

S o u r c e : Co m p a n y , C E A , C R I S I L E q u i t i e s e s t i m a t e s

The company intends to add around 43 GW of capacity over FY10-17 or nearly 6

GW every year. Cumulatively, it has added 8 GW over FY06-FY10.

We believe

a) 16 GW being already under construction

b) Bulk tendering of equipment for nearly 13GW

c) Increase in BTG equipment manufacturing capacity in India

d) Allocation of 50% power to home states on new projects

will help the company increase its annual capacity addition but achieving 43 GW

by FY17 would be a challenge. CRISIL Equities estimates NTPCs capacity

(including JV & subsidiaries) to grow at 9.5% CAGR to reach around ~60 GW by

FY17 (80% of the target, annual addition of ~4 GW). (See annexure for project

details.)

Pow er de f ici t scenar io in I nd ia to con t inue

CRISIL Research expects power demand to grow at 7.8% CAGR over FY10-15

with industrial sector leading the growth. India is estimated to add around 82 GW

of power capacity over FY10-15 leading to 9.1% CAGR growth in power supply. As

a result, the base power deficit in India is expected to moderate from 10.1% in

FY10 to 4.8% by FY15.

NTPC expected to add 13

GW over FY10-13

including 3.8 GW through

JVs and subsidiaries

Pow er deficit to

moderate but India will

continue to suffer a

shortage

We expect NTPC to add

around 43 GW over

FY10-17


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NTPC Ltd

Figure 1 : Power deficit to moderate

Source: CEA, CRI SIL Resea rch

The declining power deficit is expected to lower merchant tariff rates.

Nevertheless, India is expected to remain power deficit creating opportunities for

power generators such as NTPC. We believe players operating under the cost-plus

model are currently better placed over other players as the most of the latter rely

on merchant power sale to maintain profitability.

CERC tariff norms provide stability of earningsThe Central Electricity Regulatory Commissions new tariff norms (2009-14)

mandate - a) 15.5% return (additional incentive of 0.5% on timely completion);

b) incentive for higher availability and better operating parameters; and c) further

income from Unscheduled Interchange (UI). Though regulated returns cap NTPCs

upside potential, they provide stable cash flows and earnings.

PP As for over 1 lakh MW to maintain fixed RoE model

The national tariff policy has mandated that power procured from public sector

projects after the January 2011 deadline would be through the competitive

bidding process. Few months prior to the deadline, NTPC signed PPAs with various

SEBs for the supply of 1 lakh MW, including that for existing capacity of 33 GW.

Thus, the company has nearly 67 GW of projects which would be executed in

future under the fixed RoE model. Of these, around 16GW of capacity is currently

under construction whereas the rest is still under various stages of development.

While some of these projects could get cancelled due to different execution issues

nevertheless, we believe these projects will help NTPC to maintain its cost-plus

business model till and beyond the 12th Five-Year Plan.

0

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4

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8

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12

0

200

400

600

800

1000

1200

1400

FY05

FY06

FY07

FY08

FY09

FY10

FY11E

FY12E

FY13E

FY14E

FY15E

(MU)

Demand Supply Deficit (RHS)

Signing of 1 lakh MW of

PPAs means NTPC would

not have to face

competitive pressure

over the 12 th Plan period

and further


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NTPC Ltd

Table 3: Details of PPAs signed

Status of projects MWExisting capacity 33,194

Capacity under construction 15,740

Capacity under tendering process 14,311 (of which 13140 MW will be under bulk tendering)

Capacity under development 36,790

PPAs signed 1,00,035

S o u r c e : Co m p a n y , C R I S I L E q u i t i e s

Fuel securi ty: A key differentiator

CRISIL Equities believes that NTPC is relatively better placed in face of the

impending coal shortage in the country. Unlike other players where availability

and price of coal are equally critical factors (governing profitability), NTPC has to

focus only on availability. Since the fixed RoE model ensures pass-through of coal

cost fluctuations, NTPC has to focus on demonstrating high PAF to get efficiency-

linked incentives.

Coal demand: Being a public sector entity and one of the largest clients of Coal

India Ltd (Indias primary coal producer), we believe the supply of coal to NTPC

would be a key priority for Coal India. Coal India would provide 90% of the

normative requirement of coal for NTPCs plants commissioned before 31 March

2009, whereas for its future projects it would supply nearly 70% of the coal

requirement. This provides a relatively higher fuel security than new projects of

other players where in only 50-60% of the plants coal requirement would be

provided by Coal India. This is a key advantage as Coal Indias prices are

significantly lower than imported coal prices.

CRISIL Equities estimates that NTPCs (standalone) coal requirement will grow at

8.4% CAGR from 135 mn tonnes in FY10 to 237 mn tonnes in FY17. Indias

production is expected to lag the expected rise in demand resulting in necessity

for coal imports. The company has been making provisions for 15-20% blending

of imported coal for all the new project equipment that it has ordered.

Figure 2: Coal demand-supply scenario Figure 3 : NTPCs estimated coal requirements#

Source: CRISIL Research

#standalone

Source: CRISIL Equ ities

0

20

40

60

80

100

120

140

160

0

100

200

300

400

500

600

700

800

900

1000

FY05 FY06 FY07 FY08 FY09 FY10

(mn to nne)

Demand Supply Imports (RHS)

135143

162176

194

211222 237

0

50

100

150

200

250

FY10

FY11E

FY12E

FY13E

FY14E

FY15E

FY16E

FY17E

Mn tonne

Existing projects to get

90% of the requirement

whereas new projects

would receive 70% of

the requirement


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NTPC Ltd

Further, the company has been taking steps to secure fuel supplies through the

development of captive coal blocks as well as scouting for coal assets

internationally. Within the allocated coal blocks, three blocks - Pakri-Barwadih,

Chatti-Bariatu and Kerandi - have received environmental clearances and are at

advance stages of development. The Pakhri-Barwadih coal block is expected to

commence production from end of FY12 and would ramp up to full production of

15 MTPA by FY15.

Table 4: Captive coal blocks allocated to NTPC#

Name of coalblock

Estimatedreserves

(Mn tonne)

Annualproduction

(MTPA)

Projects to which coalwill be supplied

Environmentalclearance

Remarks

Pakri-Barwadih,

Jharkhand1,436 15

Eastern and northern

region plantsReceived

MDO appointed, expected to commence

production by end of FY12. Land

acquisition started

Chatti-Bariatu 194 7Barh II and Tanda

Expansion

Received -

Kerandari 285 6Barh II and Tanda

expansionReceived -

Dulanga 245 7 Darlipalli Applied for -

Talaipalli 1,26718

Lara Applier forNTPC-SCCL Global Ventures appointed

as MDO

Total 3,427 53

#In addition to coal block to be developed by CIL NTPC Urja Pvt. Ltd

S o u r c e : Co m p a n y , C R I S I L E q u i t i e s

Gas demand: The situation of gas shortage has considerably improved in FY10

with the gas stations registering best ever PLF of 78.38% in FY10 as compared to67.01% in FY09. While the availability of gas-based stations remained strong at

89.02% during H1FY11 (against 87.09%), PLF was impacted due to low demand

schedule as a result of heavy rains. Currently, NTPC has no gas-based projects

under construction, thus the demand for gas is expected to remain stable.

Demonstrated operational efficiencies

High PLF: NTPC has demonstrated strong efficiencies in operations of its coal-

based plants and has maintained PLF above 90% for the past three consecutive

years. The PLF of the company has been much higher than the all-India average;

and higher fuel security will ensure it remains so in the future.

Competitive tariffs: Since most of its coal-based plants are pit-head / near to

fuel source, the company has been able to maintain a low-cost structure and,

hence, competitive tariffs. Its average tariff for FY10 was Rs 2.27 per kwh.

Turnaround of plants: The company has taken over four power stations with

cumulative capacity of 2025 MW and has successfully turned around their

operations. These stations have reported better PLF after NTPC took over.


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NTPC Ltd

Figure 4: PLF comparison Figure 5 : NTPCs average tariffs

Source: CRISIL Research

#standalone

Source: Company, CRISIL Equit ies

Strong balance sheet to support project financing

We estimate that the company would be comfortable in financing its new projects

through internal accruals and debt without resorting to raising equity. Considering

the stability of returns from its projects and high credit rating of the company, we

do not foresee any constraints for raising debt in future.

Land acquisition and MoEF clearance: key bottlenecks

In the current scenario wherein MoEF clearances have delayed or adversely

impacted many projects, we believe it would be a key monitorable for NTPCs

projects. Further land acquisition is also expected to create bottleneck in timely

execution of its projects. It is critical that none of the existing pipeline of projects

is delayed or cancelled due to two main following reasons.

a) If the project from the current pipeline is cancelled, it loses the benefit of thecost-plus model as all new projects from hereon would be under competitive

bidding.

b) CERC regulations mandate 0.5% additional return (over 15.5%) for executionof projects within the timeline specified by the regulator.

0

10

20

30

40

50

60

70

80

90

100

FY06 FY07 FY08 FY09 FY10 H1FY11

All India NTPC

0

50

100

150

200

250

FY07 FY08 FY09 FY10

(paise/ kwh)


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NTPC Ltd

Key risksProject execution a key monitorable

In the past, NTPC has faced several execution constraints leading to delay of its

projects. While the company has taken measures such as setting up of a project

monitoring cell for live monitoring of execution of various projects, we believe,execution will remain a key monitorable.

Downward revision in fixed RoE and stringent norms

Under the current regulations, which are applicable till FY14, CERC mandates

15.5% RoE (with additional 0.5% for timely execution) along with incentives

based on operating above certain normative parameters. Any downward revision

in fixed RoE or tightening of operating norms for incentive calculation post FY14

could have an adverse impact on the profitability of the company.

Lower coal production can be a dampener

If the mines from which Coal India would be supplying to NTPCs new projects get

delayed, the execution of projects could be affected. The MoEF (Ministry of

Environment and Forest) clearances could be a major bottleneck for new mines of

Coal India and would affect the overall coal production.


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NTPC Ltd

Financial OutlookRevenues to grow at three-year CAGR of 15.0%

NTPCs consolidated revenues are expected to grow at a three-year CAGR of

15.0% to Rs 736 bn in FY13 driven primarily by capacity addition of 11.8 GW over

FY10-13. While capacity is expected to be added at 11.1% CAGR, power

generation is expected to increase at 9.7% CAGR to 315 BU by FY13.

Figure 6: Installed capacity and generation Figure 7: Revenue grow th

Source: Company, CRISI L Equities Source: Company, CRISIL Equities

Adjusted PAT to grow at 10.7% CAGR over FY10-13

CRISIL Equities estimates NTPCs regulated profits to grow at 15.0% CAGR over

FY10-13 as the regulated equity of the company increases due to capacity

additions. However, the declining other income on account of redemption of SEB

bonds and conversion of cash to WIP would lower the overall profit growth to

10.7% CAGR over FY10-13. The conversion of cash into productive assets in

future is expected to boost growth beyond FY13.

Figure 8: Estimated break-up of reported profits

Source: Company, CRISIL Equit ies

RoE, RoCE to improve; leverage to increaseAs the cash on the balance sheet is transferred to productive assets, we expect

NTPCs RoE and RoCE to improve. The blended RoE of the company is expected to

0

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0

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FY06

FY07

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FY09

FY10

FY11E

FY12E

FY13E

BUGW

Installed Capacity Generation (RHS)

0%

5%

10%

15%

20%

25%

30%

0

100

200

300

400

500

600

700

800

FY06

FY07

FY08

FY09

FY10

FY11E

FY12E

FY13E

Rs bn

Income Growth (RHS)

42% 42% 45%50%

33% 35%36%

35%

26% 23%18% 15%

0%

20%

40%

60%

80%

100%

FY10 E FY11E FY12E FY13E

Regulated PAT Ef ficiency gains + UI Post tax - Other income

Revenues likely to grow at

a three-year CAGR of

15.0% to Rs 736 bn in

FY13 driven by capacity

additions

Declining other income tolower PAT growth;

conversion of cash to

productive assets positive

over long term

Deployment of cash to

increase blended RoE


12/23


NTPC Ltd

increase from 13.8% in FY10 to 14.6% by FY13. Further, as the rate of capacity

addition increases, the net debt to equity is expected to increase from 0.4x to

0.7x by FY13, but will remain comfortable.

Figure 9: RoCE and RoE to improve Figure 10: Net debt-equity and interest cover

Source: Company, CRISI L Equities Source: Company, CRISIL Equities

6.0

7.0

8.0

9.0

10.0

11.0

12.0

13.0

14.0

15.0

16.0

FY09 FY10 FY11E FY12E FY13E

RoE RoCE

0.0

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net D/E Interest cover (RHS)


13/23


NTPC Ltd

Management OverviewCRISIL's fundamental grading methodology includes a broad assessment of

management quality, apart from other key factors such as industry and business

prospects, and financial performance.

Experienced and capable managementBy virtue of its long experience in the power sector and the largest installed power

capacity in the country, NTPC presents a highly experienced management and

strong technical and project management expertise. The management has been

able to consistently raise the level of performance and professionalism, resulting

in improved project execution, higher efficiencies and greater success in dealing

with issues such as delayed payments from state electricity utilities. The fact that

many of the top officials have been associated with the company for a long period

of time, in the context of a high performance public sector unit, assures continuity

and institutionalised knowledge.

Maharatna status provides greater autonomy While operating in a public sector framework introduces unavoidable constraints in

strategic decision making and larger investments, the Maharatna status provides

NTPC relatively greater autonomy in functioning in both domestic and global

markets. As a result of being granted the Maharatna status, the cap on equity

investment in JV/SPV has been raised from US$0.22 bn to US$1.1 bn, thus

enabling the management to take decisions of investing in larger power projects.

Further, it has delegated power to management for securing fuel supply through

acquisition or equity investment in coal mines.

Change of chairman and managing directorDuring the year, Mr Arup Roy Choudhury took over as CMD of NTPC. He is a civil

engineer from Birla Institute of Technology and has done his post graduation in

management from IIT Delhi. He was earlier CMD of National Buildings

Construction Corporation (NBCC) and also associated with various public and

private sector enterprises. He has the distinction of becoming the youngest chief

executive when he joined as CMD of NBCC; he is responsible for turning NBCC

around.

The cap on equity

investment in JV/ SPV

raised from US$0.22

bn to US$1.1 bn


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NTPC Ltd

Corporate Governance

CRISILs fundamental grading methodology includes a broad assessment of

corporate governance and management quality, apart from other key factors such

as industry and business prospects, and financial performance. In this context,

CRISIL Equities analyses the shareholding structure, board composition, typical

board processes, disclosure standards and related-party transactions. Any

qualifications by regulators or auditors also serve as useful inputs while assessing

a companys corporate governance.

The corporate governance at NTPC meets the statutory levels supported by good

board practices and an independent board. NTPC enters into memorandum of

understanding (MOU) with Government of India (GoI) setting yearly targets in

financial and operational areas. The assessment of performance vis-a-vis the

targets by Ministry of Power and Department of Public Enterprises ensures

transparency and accountability.

Board composition

NTPCs board consists of 19 members, of whom seven are executive directors and

two are GoI nominee directors. The fairly large board, not uncommon among

PSUs, includes non executive directors whose profile brings to the table sector

experience relevant to NTPC as well as diversified technical, business and

administrative experience.

Board processes

The board processes appear to be well structured, with committees - audit,

remuneration and project sub-committees - in place, supporting a good corporate

governance and decision-making framework.

Dominant government control structurally limitsminority shareholder right

By virtue of 84.5% stake, the GoI, as the majority shareholder, enjoys rights

which always place the minority shareholders at a potential disadvantage with

regard to having a say in broader corporate affairs. This is an inherent structural

limitation as compared to the rights enjoyed by non-owner shareholders in a more

widely-held corporation. While NTPCs public sector character introduces

procedures, audits, etc. which are theoretically designed to assist good corporate

governance and greater accountability, in practice it still exposes the company to

the relatively greater risk of influence from the majority owner.

Commendable disclosure standards and transparency

The quality of disclosure and transparency in reporting can be considered as good,

judged by the level of information and detail furnished in annual reports, website

and other publicly available information. Further, it appears committed to a high

level of corporate social responsibility, as reflected in the various initiatives it has

adopted in this regard.

Corporate governance

practices are good


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NTPC Ltd

Valuation Grade: 5/ 5We have used the discounted cash flow (DCF) method to value NTPC. We have

rolled over our earnings estimates to FY13 and arrived at a fair value of Rs 232

per share. This fair value implies P/E multiples of 18.9x FY12E and 17.0x FY13E

earnings and P/BV multiples of 2.6x FY12E and 2.4x of FY13E book values.

Key DCF assumptions

We have considered the discounted value of the firms estimated free cash flow

from FY13 to FY20.

Our assumptions factor in 10% CAGR growth in capacity additions over FY10-15

and 6.7% CAGR over FY15-20. We have assumed a terminal growth rate of 5%

beyond FY20. Considering the power deficit scenario in India and strong cash

generation by NTPC, which would be deployed in power assets, we believe these

capacity additions are possible.

WACC computation

FY13-20 Terminal value

Cost of equity 13.0% 13.0%

Cost of debt (post tax) 7.0% 5.9%

WACC 10.5% 9.4%Terminal growth rate 5.0%

Sensitivity analysis to terminal WACC and terminal grow th rate

Terminal growth rate

TerminalWACC 3.0% 4.0% 5.0% 6.0% 7.0%

7.4% 265 350 504 870 2,870

8.4% 198 248 327 471 814

9.4% 152 185 232 306 441

10.4% 120 142 173 217 286

11.4% 96 112 133 161 203

S o u r c e : C R I S I L E q u i t i e s e s t i m a t e s

One-year forward P/ E band One-year forward EV/ EBITDA band

Source: NSE, Company, CRISI L Equities Source: NSE, Company, CRISI L Equities

0

50

100

150

200

250

300

Apr-07

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

(Rs)

NTPC 14x 16x 18x 20x

0

500000

1000000

1500000

2000000

2500000

Apr-07

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

(Rs mn)

NTPC 10x 12x 14x 16x

We have rolled over our

earnings estimate and

fair value to FY13 and

arrived at a fair value ofRs 232 per share


16/23


NTPC Ltd

P/ E premium / discount to NIFTY P/ E movement

Source: NSE, Company, CRISI L Equities Source: NSE, Company, CRISI L Equities

Peer comparison*Companies M.cap Price/ Earnings (x) Price/ Book (x) EV/EBITDA RoE (% )

(Rs bn) FY11E FY12E FY13E FY11E FY12E FY13E FY11E FY12E FY13E FY11E FY12E FY13E

NTPC Ltd 1,426 16.4 14.1 12.7 2.1 1.9 1.8 13.1 10.8 9.5 13.3 14.3 14.6

NTPC Ltd (consensus) 1,426 15.8 14.2 12.7 2.1 1.9 1.8 11.5 9.7 8.3 13.4 13.8 14.4

CESC Ltd 37 10.8 9.3 7.0 0.8 0.8 0.8 7.8 7.3 4.6 9.6 9.6 12.4

JSW Energy Ltd 118 11.6 7.4 8.2 2.0 1.6 1.4 9.4 5.2 5.4 18.8 23.6 17.9

Torrent Power Ltd 113 12.1 10.0 9.6 2.3 1.9 1.6 6.6 5.8 6.1 21.7 22.1 18.5

Adani Power Ltd 241 35.2 9.5 7.0 3.7 2.7 2.0 27.6 6.9 4.4 10.7 32.0 32.1

NHPC Ltd 280 15.8 14.1 11.4 1.1 1.0 0.9 10.7 9.3 7.8 6.8 7.3 8.7

Neyveli Lignite Ltd 165 12.7 11.9 10.2 1.5 1.4 1.2 9.9 7.4 5.6 12.4 12.2 12.0

Tata Power Ltd 293 15.6 12.8 11.5 2.2 1.9 1.7 10.4 7.8 6.6 14.7 16.2 15.7

*as on March 21, 2011

S o u r c e : C R I S I L E q u i t i e s , I n d u s t r y e s t i m a t e s

5

5.5

6

6.5

7

7.5

8

8.5

9

9.5

10

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Apr-07

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Premium/Discount to NIFTY Median 10 yr G-Sec yeild

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

Apr-07

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

1yr Fwd PE (x) Median PE

+1 std dev

-1 std dev


17/23


NTPC Ltd

Company OverviewNTPC is Indias largest power utility established in 1975. The company is

primarily a thermal power producer with an installed capacity of 33,194 MW

(including JVs and subsidiaries) as of December 2010. Historically, coal-based

capacity has been the mainstay of power generation (contributing nearly 82% of

installed capacity). Further, NTPC has also ventured into various other

businesses in the power sector value chain such as power trading, equipment

manufacturing, coal mining and project consultancy.

Figure 11: Capacity break-up ownership Figure 12: Capacity break-up fuel type

Source: Company, CRISI L Equities Source: Company, CRISI L Equities

Regulations: NTPC is governed by the CERC regulations which mandate a

15.5% RoE for power projects (additional 0.5% is provided if the project iscompleted on time). All the costs such as fuel, interest and depreciation can be

passed through in the tariffs (after CERC approval), thus insulating the

profitability of the company from any cost variation. The regulation also provides

for efficiency incentives if the power plant operates at parameters over those

specified as normative in the regulations.

Key milestones

1975 The company was incorporated

1985 Complete decade of existence and achieved 2,200 MW of capacity

1987 500 MW of Korba unit synchronised; installed crosses 5,000 MW

1997 Identified by GoI as Navratna PSU; 100 BU generation in a year

1998 Commissioned first naphtha unit of 350 MW at Kayamkulam

2002 Three wholly owned subsidiaries - NTPC Electric Supply Company Ltd,NTPC Hydro Ltd and NTPC Vidyut Vyapar Nigam Ltd - incorporated

2004 Listed on stock exchanges

2006 Badarpur Station with 705 MW transferred to NTPC

Another 740 MW added through JV Ratnagiri Gas Power Project Ltd

2009 30,000 MW capacity achieved, signs long-term FSA with Coal India for 20years

2010 Agreement with NPCIL to form company to set up nuclear power project.Government divests 5% stake through FPO

NTPC, 90%

JV's, 10%

Subsidiaries,

0%

Coal-based, 82%

Gas-

based, 18%


18/23


NTPC Ltd

Figure 13: Corporate structure and business overview

S o u r c e : C o m p a n y

NTPC Ltd

Pow er Generation

25875 MW Coal Based (standalone)

3955 MW Gas Based (standalone)

PowerGeneration

NTPC Hydro Ltd

(100%)

Kanti Bijlee

Utpadan Nigam

Ltd (64.57%)

Bhartiya Rail

Bijlee Company

Ltd (74%)

Aravali Power

Company Ltd

(50%)

NTPC Tamil Nadu

Energy Company

(50%)

Nabinagar Power

Generating

Company (50%)

NTPC SAIL Power

Company Pvt. Ltd

(50%)

Ratnagiri Gas

Power Pvt. Ltd

(30.17%)

Meja Urja Nigam

Pvt. Ltd (50%)

Anushakti VidhyutNigam Ltd (49%)

Services

NTPC Electric

Supply Company

L td

(100%)

Utility Powertech

Ltd

(50%)

NTPC Alstom

Power Services

Pvt. Ltd

(50%)

National High

Power Test

Laborat ory Pvt.Ltd

(25%)

Energy Efficiency

Service Ltd

(25%)

Equipmentmanufacturing

NTPC BHEL

Power Projects

Pvt. Ltd

(50%)

BF NTPC Energy

Systems Ltd.

(49%)

Transformers and

Electricals Kerala

Ltd

(44.6%)

CoalMining

International Coal

Ventures Pvt. Ltd

(14.28%)

NTPC SCCL

Global Ventures

Pvt. Ltd

(50%)

CIL NTPC Urja

Pvt. Ltd

(50%)

PowerTrading

NTPC Vidyut

Vyapar Nigam

(100%)

National Power

Exchange Ltd

(16.67%)


19/23


NTPC Ltd

Table 5: Project details*

Project cost

(Rs mn)

Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Fuel

LinkageEPC Contrac

Sipat - I 83,234 660 1320 0 0 0 0 0 Yes Yes

Barh - I 86,930 0 0 0 1320 660 0 0 Yes Yes

Korba - III 24,485 500 0 0 0 0 0 0 Yes Yes

Dadri 25,677 490 0 0 0 0 0 0 Yes Yes Farakka - III 25,704 0 500 0 0 0 0 0 Yes Yes

Simhadri - II 50,385 0 1000 0 0 0 0 0 Yes Yes

Bongaingaon - I 43,754 0 0 750 0 0 0 0 Yes Yes

Mauda - I 54,593 0 0 1000 0 0 0 0 Yes Yes

Barh - II 73,410 0 0 0 660 660 0 0 Yes Yes

Rihand - III 62,308 0 0 500 500 0 0 0 Yes Yes

Vindhyachal - IV 59,150 0 0 500 500 0 0 0 Yes Yes

Solapur 66,000 0 0 0 0 660 660 0 Yes Under bulk tende

Mauda - II 66,000 0 0 0 0 0 1320 0 Yes Under bulk tende

Singrauli - III 25,000 0 0 0 500 0 0 0 No No

Vindhyachal - V 25,000 0 0 0 500 0 0 0 No No

Lara 80,000 0 0 0 0 0 800 800 Yes Under bulk tende

Darlipali 80,000 0 0 0 0 0 0 1600 Yes Under bulk tende

Gajmara 80,000 0 0 0 0 0 0 800 Yes Under bulk tende

Coal based 1650 2820 2750 3980 1980 2780 3200

Koldam 45,272 0 0 600 200 0 0 0 NA Yes

Tapovan Vishnugad 35,742 0 0 130 390 0 0 0 NA Yes

Hydro 0 0 730 590 0 0 0

Jhajhhar HPGCL 78,924 500 1000 0 0 0 0 0 No Yes

Vallur - TNEB 86,396 0 1000 500 0 0 0 0 Yes Yes

Meja JV UP - 50% 66,000 0 0 0 0 660 660 0 Yes Under bulk tende

Nabinagar 99,000 0 0 0 0 660 1320 0 Yes Under bulk tende

JVs 500 2000 500 0 1320 1980 0

Nabhinagar 53,520 0 0 500 500 0 0 0 No Yes

MTPS - BSEB 17,550 0 0 380 0 0 0 0 No Yes Subsidiaries 0 0 880 500 0 0 0

Total 1,494,033 2150 4820 4860 5070 3300 4760 3200

*based on expected CoDs

S o u r c e : C R I S I L E q u i t i e s , CR I S I L R e s e a r c h , i n d u s t r y


20/23


NTPC Ltd

Annexure: Financials

S o u r c e : C R I S I L E q u i t i e s

Income statement Balance Sheet

(Rs mn) FY09 FY10 FY11E FY12E FY13E (Rs mn) FY09 FY10 F Y11E F Y12E FY13E

Operating income 442,068 484,671 525,932 626,934 736,445 Liab il it ies

EBITDA 101,267 126,501 136,698 173,307 208,367 Equity share capital 82,455 82,455 82,455 82,455 82,455

EBITDA margin 22.9% 26.1% 26.0% 27.6% 28.3% Reserves 489,626 542,761 596,356 655,371 720,908

Depreciation 25,146 29,170 30,391 37,743 47,137 Minorities - - - - -

EBIT 76,121 97,331 106,307 135,564 161,230 Ne t worth 572,081 625,216 678,811 737,826 803,363

Interest 14,069 13,404 15,958 25,237 34,779 Convertible debt - - - - -

Operating PBT 62,052 83,927 90,349 110,327 126,451 Other debt 389,738 442,377 534,543 618,461 725,979

Other income 31,953 26,322 24,930 22,118 20,631 Total debt 389,738 442,377 534,543 618,461 725,979

Exceptional inc/(exp) 13,021 5,469 5,000 - - Deferred tax liability (net) 1 2,297 2,297 2,297 -

PBT 107,026 115,718 120,280 132,445 147,082 Total liabil itie s 961,820 1 ,0 69 ,8 90 1 ,2 15 ,6 51 1 ,3 58 ,5 84 1 ,5 29 ,3 42

Tax provision 26,101 27,341 28,419 31,293 34,751 Assets

Minority interest - - - - - Net fixed assets 349,268 387,666 448,335 597,278 810,814

PAT (Repor ted) 80,925 88,377 91,861 1 01 ,1 52 1 12 ,3 30 Capital WIP 309,292 376,815 461,977 453,710 409,475

Less: Exceptionals 13,021 5,469 5,000 - - Total fixed assets 658,560 764,481 910,312 1 ,0 50 ,9 88 1 ,2 20 ,2 8 9

Adjusted PAT 67,904 82,908 86,861 101,152 112,330 Inves tments 115,095 98,341 81,702 65,187 48,672

Current assets

Ratios Inventory 34,108 35,835 40,852 48,698 57,204

FY09 FY10 FY11E FY12E FY13E Sundry debtors 38,189 70,808 79,718 98,462 119,697

Growth Loans and advances 80,513 65,674 78,766 93,893 110,294

Operating income (%) 14.0 9.6 8.5 19.2 17.5 Cash & bank balance 172,505 160,530 156,959 156,030 158,612

EBITDA (%) (9.3) 24.9 8.1 26.8 20.2 Marketable securities 1,865 19,435 19,435 19,435 19,435

Adj PAT (%) (16.3) 22.1 4.8 16.5 11.1 Total cur rent asse ts 327,180 352,282 375,731 416,518 465,242

Adj EPS (%) (16.3) 22.1 4.8 16.5 11.1 Total cur rent liabili ties 139,409 145,601 152,481 174,496 205,248Ne t current assets 187,771 206,681 223,250 242,022 259,994

Pro fitab il ity Intangibles/ Misc . expenditure 394 387 387 387 387

EBITDA margin (%) 22.9 26.1 26.0 27.6 28.3 Total assets 961,820 1 ,0 69 ,8 90 1 ,2 15 ,6 51 1 ,3 58 ,5 84 1 ,5 29 ,3 42

Adj PAT Margin (%) 15.4 17.1 16.5 16.1 15.3

RoE (%) 12.3 13.8 13.3 14.3 14.6 Cash flow

RoCE (%) 8.5 9.6 9.3 10.6 11.2 (Rs Mn) FY09 FY10 F Y11E F Y12E FY13E

RoIC (%) 18.6 16.5 14.3 14.1 13.7 Pre-tax profit 94,005 110,249 115,280 132,445 147,082

Total tax paid (26,102) (25,045) (28,419) (31,293) (37,048)

Valuations Depreciation 25,146 29,170 30,391 37,743 47,137

Price-earnings (x) 21.8 20.6 16.4 14.1 12.7 Working capital changes (3,504) (13,315) (20,139) (19,701) (15,391)

Price-book (x) 2.6 2.7 2.1 1.9 1.8 Ne t cash from ope rations 89,545 101,059 97,112 119,193 141,780

EV/EBITDA (x) 16.8 15.6 13.1 10.8 9.5 Cash from investments ;

EV/Sales (x) 3.9 4.1 3.4 3.0 2.7 Capital expenditure (146,194) (135,084) (176,222) (178,419) (216,439)

Dividend payout ratio (%) 43.0 41.7 41.7 41.7 41.7 Investments and others 17,510 (816) 16,639 16,515 16,515

Dividend yield (%) 2.3 2.2 2.7 3.0 3.3 Ne t ca sh fr om inv es tm en ts (1 28,684) (135,900) (159,583) (161,904) (199,924)

Cash from financing

B/S ratios Equity raised/(repaid) (614) - - - -

Inventory days 37 37 39 40 40 Debt raised/(repaid) 83,733 52,639 92,166 83,918 107,519

Creditors days 109 112 106 104 105 Dividend (incl. tax) (34,784) (36,815) (38,266) (42,137) (46,793)

Debtor days 32 54 56 58 60 Others (incl extraordinaries) 9,704 7,042 5,000 - -

Working capital days 10 15 26 33 37 Net cash from financing 58,039 22,866 58,900 41,781 60,725

Gross asset turnover (x) 0.7 0.7 0.7 0.7 0.7 Change in cash position 18,900 (11,975) (3,571) (929) 2,582

Net asset turnover (x) 1.4 1.3 1.3 1.2 1.0 Closing cash 172,505 160,530 156,959 156,030 158,612

Sales/operating assets (x) 0.7 0.7 0.6 0.6 0.6

Current ratio (x) 2.3 2.4 2.5 2.4 2.3 Quarterly financials - standalone

Debt-equity (x) 0.7 0.7 0.8 0.8 0.9 (Rs Mn) Q3FY10 Q4FY10 Q1FY11 Q2F Y11 Q3F Y11

Net debt/equity (x) 0.4 0.4 0.5 0.6 0.7 Ne t Sales 117,092 127,315 133,026 133,505 138,886

Interest coverage 5.4 7.3 6.7 5.4 4.6 Change (q-o-q) 9% 4% 0% 4%

EBITDA 38,907 30,439 33,448 33,713 42,305

Per share Change (q-o-q) -22% 10% 1% 25%

FY09 FY10 FY11E FY12E FY13E EBITDA margin 33.2% 23.9% 25.1% 25.3% 30.5%

Adj EPS (Rs) 8.2 10.1 10.5 12.3 13.6 PAT 23,650 20,177 18,419 21,074 23,714

CEPS 11.3 13.6 14.2 16.8 19.3 Adj PAT 23,650 20,177 18,419 16,067 23,016

Book value 69.4 75.8 82.3 89.5 97.4 Change (q-o-q) -15% -9% -13% 43%

Dividend (Rs) 4.2 4.5 4.6 5.1 5.7 Adj PAT marg in 20.2% 15.8% 13.8% 12.0% 16.6%

Actual o/s shares (mn) 8,245.5 8,245.5 8,245.5 8,245.5 8,245.5 Adj EPS 2.9 2.4 2.2 1.9 2.8


21/23


NTPC Ltd

Focus Charts

Capacity trend and generation Revenue and reported PAT trends


RoE and RoCE trends Excess return of NTPC over NIFTY vs. interest rates


Estimated break-up of reported profits Shareholding pattern over the quarters


0

50

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350

0

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45

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FY07

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FY11E

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BUGW

Installed Capacity Generation (RHS)

0.0%

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Rs bn

Revenues PAT

Revenues growth (RHS) PAT Growth (RHS)

6.0

7.0

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12.0

13.0

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16.0


RoE RoCE

-1

-0.5

0

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9

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9

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0

Jul-1

0

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0

All listedhistory

10yr G-sec yield Excess return of NTPC over NIFTY

42% 42% 45%50%

33% 35%36%

35%

26% 23%18% 15%

0%

20%

40%

60%

80%

100%

FY10 E FY11E FY12E FY13E

Regulated PAT Efficiency ga ins + UI Post tax - Other income

84.5% 84.5% 84.5% 84.5%

3.4% 2.9% 2.6% 2.6%

8.4% 8.8% 9.1% 9.1%

3.7% 3.8% 3.9% 3.9%

60.0%

70.0%

80.0%

90.0%

100.0%

Dec-10 Sep-10 Jun-10 Mar-10

Promoter FII DII Others


22/23


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