Is NTPC an Good Stock to Invest? | NTPC Stock Update - 30th June 2009 | Power Sector Stocks

Company Name	-	NTPC
Research Firm	-	Emkay Research
Research Analyst	-	Amit Golchha
Recommendation	-	Reduce

Emkay Research has advised "Reduce" for NTPC.

We believe that the premium valuations of NTPC are discounting 'Tons of Expectations'. The valuations are pricing in (1) ROE improvement of 310 bps to 17.7% and thereby, convergence of reported ROE into core ROE and (2) earnings CAGR of 11% (consensus)during FY09P-FY12E. Our analysis of each of the factors driving the expectations indicates that NTPC is unlikely to meet them. Consequently, we expect negative surprises going forward. We expect an earnings CAGR of 9% and expect ROE to reduce by 60 bps to 14.0% during FY09P-FY12E. At CMP of Rs197, the stock is trading at 2.6xFY10E Book Value or 14% premium to its peers with comparable ROE. We forecast a 160bps contraction in spread between NTPC's 1-yr fwd core ROE and 10-year Treasury bond yield, putting pressure on NTPC's valuations. With the company unlikely to live up to market expectations, we rule out any possible re-rating triggers. We re-initiate coverage on the stock with a 'REDUCE' rating and SoTP based target price of Rs187/Share.

Premium valuations discounting 'Tons of Expectations'

The premium valuations of NTPC at 2.6x FY10E Book Value and 18.9x FY10E earnings are discounting 'Tons of Expectations'. The valuations are pricing in convergence of reported ROE (14.6%) into core ROE driven by (1) efficiency improvement, (2) benefit of conversion of cash into core assets, (3) positive impact of new CERC regulations and (4) additional ROE of 50 bps in new projects. The valuations are also discounting earnings CAGR of 11% (consensus) during FY09P-FY12E driven by (1) installed capacity addition of 13-14 GW, (2) identical commercial capacity additions, (3) the benefit of higher investment per MW, (4) earnings upside from coal mining and increase in fuel supplies and (5) lower effective tax rate at 22%.

NTPC unlikely to meet these expectations, negative surprises in store

Our analysis of each of the factors indicates that NTPC is unlikely to meet these expectations and consequently we expect negative surprises going forward. Closer scrutiny indicates (1) bleak probability of efficiency improvement, (2) substantial spillover in capacity commissioning and commercialization, (3) neutral impact of new CERC regulations, (4) conversion of cash into capital WIP, (5) negligible contribution from coal mining, (6) no impact of increased fuel supplies, (7) reduction in proportionate regulated equity base and (8) increase in effective tax rate.

Earnings growth to moderate, ROE to Reduce

Despite huge capacities planned, we expect NTPC's earnings growth to moderate to 9% CAGR during FY09P-FY12E versus 10% clocked during FY06-FY09P and 13% during FY03-FY06. We expect 60 bps and 310 bps reduction in reported ROE and core ROE to 14.0% and 16.2% respectively.

ROE spread over Treasury yield to contract, no re-rating triggers

At CMP of Rs197, the stock is trading at 2.6xFY10E Book Value or 14% premium to its peers with comparable ROE. We forecast a 160bps contraction in spread between NTPC's 1-yr fwd core ROE and 10-year Treasury bond yield, putting pressure on NTPC's valuations. With NTPC not meeting 'Tons of Expectations' we do not foresee any re-rating triggers. We re-initiatecoverage on the stock with a 'REDUCE' rating and SoTP based target price of Rs187/ Share.

My View : Power sector bound the grow in India. There is an acute shortage of power and govt spending of 80000 cr in power sector is going to fuel the growth of the power sector companies. But, how much NTPC going to benefit out of that, is a difficult question to answer. Tata Power, Reliance Power or BHEL is a better stock for an investor than NTPC. It is advisable to avoid this stock at the moment.

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