After listing, NTPC has always underperformed the market when the market has given a positive return (barring CY04 when investors were still understanding the business model) and outperformed when the market has given negative returns. This trend has been violated so far in CY13 with 14% underperformance. But with the stock trading close to two standard deviations below mean and RoEs having bottomed out in FY12, we believe it is time for investors (who are looking for a defensive play) to buy.
In July, NTPC and CIL signed 28 (out of 29) FSAs for 14GW of capacity that comes on-stream since March 2009. We believe the FSA signing could improve coal supplies to these projects.
Target price cut to R172 to factor in (a) -1% to +1% EPS adjustment, (b) change in valuation methodology to P/BV to better capture short-term fluctuations. Our target P/BV multiple is set at 1.6x which is set at 1 SD below average P/BV multiple post March 2009 (to factor in the deteriorating operating environment).
In the first year (FY13) of the XIIth Plan, NTPC has comfortably met its targets with 4.2GW of additions. We expect that over FY12-14E commercial capacity would grow at a CAGR of 8%, which would drive regulatory equity block growth of 14% CAGR.