We upgrade NTPC to Buy (from Add previously) with a target price of Rs 160 as the CMP (current market price) ignores the inherent strengths of the company relative to peers— (i) disproportionate allocation of coal due to proximity to coal mines, (ii) higher off-take due to low-cost take or pay arrangements, and (iii) consistent earnings growth with continued investment in new projects. At 1.1x P/B (price-to-book ratio), NTPC trades at a 45% discount to historical trading multiples, ignoring the inherent strengths of the company.
Proximity to coal mines will ensure higher coal allocation compared to peers: Proximity to coal mines, dedicated evacuation infrastructure and supplement through captive coal blocks will likely allow NTPC to continue to enjoy a disproportionate allocation of domestic coal supplies. A bulk of NTPC’s extant power plants receives coal supplies through dedicated MGR (merry-go-round rail) facilities, with 75% of coal supplies from pit-head locations. Only two coal sources (MCL-Talcher and SECL-Korba) are not fully meeting coal supply commitments currently. Even for incremental capacities, nearly 30% are dependent on captive coal.
Low cost of generation will keep it ahead of peers on cost curve: With low-cost domestic coal continuing to dominate fuel sourcing and a relatively ageing fleet (with a mix of new and old plants), average cost of generation for NTPC will continue to be superior to that of IPPs (independent power producers)—NTPC had an average fuel cost of 1.7/kwh in FY13 compared to >2.5/kwh for private sector players. While cost of generation is less ominous for NTPC (under cost-plus regime), efficient players such as NTPC will continue to enjoy a higher off-take as state distribution utilities become more cost conscious.
NTPC trades at deep discount to historical multiples: At 1.1 P/B and 9x P/E (price-to-earnings ratio), NTPC is trading at historical lows, while ignoring the inherent strength of the cost-plus business model as well as the 9% CAGR (compound annual growth rate) in earnings factored by us (over FY2011-16e). We upgrade NTPC to Buy with a revised target price of Rs 160 (165 previously). While fuel security remains an area of concern, cost-plus sale arrangement makes NTPC relatively better-positioned in comparison to IPPs with lower fuel and off-take risk even as availability-based incentive ensures resilience of earnings.
In our view, improved visibility on the capacity addition programme beyond the immediate 14 GW targets as well as clarity on