Company Background

• NTPC Limited is the largest power generating and Navratna status company of India; it was incorporated in the year 1975 as National Thermal Power Corporation Private Limited to accelerate power development in the country.
• The Company's status was converted into a public limited in the year 1985 and the name was changed to National Thermal Power Corporation Limited.
• As of September 30, 2009, company’s total installed power generation capacity was 30,644 MW, including 28,350 MW of generation capacity through 112 units owned by the company and 2,294 MW of capacity through two joint venture companies. Of company’s owned capacity, 86.0% is coal-based, operated through 15 coal-based power stations, and 14.0% is gas-based, operated through seven gas-based power stations (including one naphtha-fired station). In Fiscal 2009, the company generated 206.9 billion units of electricity through company’s owned stations.
• As of September 30, 2009, company’s owned installed power generating capacity is approximately 18.6% of India's total installed capacity. In Fiscal 2009, the company contributed 28.6% of the total power generation of India.
• Post issue Promoters & Promoter’s group shareholding will reduce to 84.50% from existing 89.50%.

Objective of the Issue

• The objects of the Offer are to carry out the divestment of 412,273,220 Equity Shares by the selling shareholder. The company will not receive any proceeds from the Offer and all proceeds shall go to the selling shareholder.

Strengths

• Future Plans
  NTPC is currently constructing additional capacity aggregating to 17,930 MW consisting of 45 units at 16 locations. The company is also pursuing additional projects to enable the company to become a 75,000 MW company by Fiscal 2017.

• Superior Credit Rating and Financials
  The Company enjoys a high credit rating of AAA and LAAA by CRISIL and ICRA, respectively, and holds a solid balance sheet. Company’s strong financial ratios, visibility of cash flows and credit ratings enable it to have ready access to domestic and international credit markets to fund its investments requirement. As of March 31, 2009, company’s debt to equity ratio was 0.6, debt service coverage ratio was 3.7 and interest service coverage ratio was 10.2. The company generated net cash of Rs. 96,881 million in Fiscal 2009 from operating activities. More than 90% of company’s sales are done to SEBs and state owned distribution companies for which payments are secured through LCs and the Tripartite Agreements.

• Long term coal and gas supply agreements
  NTPC enters into long term fuel supply agreements to ensure availability of fuel at its power plants. As of September 30, 2009, the company has signed long term coal supply agreements (CSAs) with coal companies covering 12 of company’s 15 coal-based stations. The three other stations receive coal pursuant to coal supply linkages allocated to the company by the MoC while the company negotiates CSAs for them. The company has also entered into a series of agreements providing a committed supply of gas, with several gas vendors, including long-term gas supply agreements covering six of company’s gas-based generation stations. From time to time, the company enters into arrangements to cover shortages on a fall back/spot basis.

• Proximity to fuel sources
  Over 86.0% of company’s total generation capacity is coal based, and ten out of 15 of company’s coal-based stations, representing 83.0% of company’s total coal-based capacity, are located in the range of seven to 80 kilometres from the coal mines that supply them. The company has also installed company’s own merry-go-round (MGR) rail system for transporting coal from the coal mines to the generating stations. The strategic locations of company’s coal-based stations and company’s MGR rail system enable the company to reduce supply interruptions and lower transportation cost.

• High Operational Efficiency
  Its coal-based plants run at high rates of efficiency, enabling it to sell power at competitive prices and achieve savings. In FY09, its coal-based plants achieved an average PLF of 91.1%, which was way ahead of the national average of 77.2%. Its coal-based plants also achieved an all time high average availability of 92.5% in FY09. Under commercial operation, the company attained 100% realization of current bills for the sixth consecutive year. They also have a strong track-record in being able to turn around inefficient plants and enhance their efficiency levels significantly. As a result, the Company’s revenue and net profits have grown at a stable pace over last three-four years.

Weakness

• Delayed Expansion
  The company has been witnessing slow development in the projects. In Q1’10, the Company had guided 3,300 MW to be added during the year, but until now, it has completed only around 1,000 MW. NTPC’s guidance is that 17,440 MW will be added by around 2013. The main reasons for the sluggish progress include complicated and inaccessible prospective sites, rehabilitation, difficulties in land acquisition, environmental and forest-related issues, inter-State issues, and a long gestation period.

• Case against RIL is still pending
  The company executed a letter of intent with Reliance Industries Limited for the purchase 132 Trillion British thermal unit annually for a period of 17 years. Later, RIL refused to execute a gas sale and purchase agreement with NTPC. Thus, the company has filed a civil suit against RIL for declaration and specific performance before the High Court of Bombay. In case the agreement is not declared as a valid and binding contract between the company and RIL, company’s financial condition and results of operation will be negatively impacted.

Financial History

• Net Sales of the company has increased at CAGR of 16.7% to Rs. 42,196.8 crore in FY 2009 from Rs. 22,732.4 crore in FY 2005. For 6 months period ending September 2009, net sales of the company stands at Rs. 22,785.5 crore, up by 18.7% (yoy).
• PAT of the company has increased at CAGR of 9% to Rs. 8,201.3 crore in FY 2009 from Rs. 5,807 crore in FY 2005. For 6 months period ending September 2009, PAT of the company stands at Rs. 4,345.6 crore, up by 13.3% (yoy).
• OPM of the company has declined from 43.1% in FY 2005 to 32.6% in FY 2009. NPM of the company has declined from 25.5% in FY 2005 to 19.4% in FY 2009. During 6 months period ending September 2009, OPM stood at 34.7% while NPM stood at 19.1%
• Company’s ROCE fell from 13.2% in FY 2005 to 12% in FY 2009.
• Company’s return on networth fell from 13.8% in FY 2005 to 13.7% in FY 2009.
• Interest coverage ratio improved from 4.5x in FY 2005 to 5.6x in FY 2009.
• Book Value per share of the company in FY 2009 was Rs. 72.7 and for 6 months period ending September 2009 it was Rs. 74.8.
• Debt to Equity ratio increased from 0.41x in FY 2005 to 0.58x in FY 2009.

Q3’10 Result Highlights

NTPC came up with a mixed quarterly performance as its net sales for the quarter ending 31 December, 2009, were Rs. 111.84 bn, down 0.83% yoy while net profit improved by 5.07% yoy to Rs. 23.65 bn.

Peer Analysis

In our view, NTPC is the best defensive play in the Indian power sector considering its position of market leadership, strong balance sheet, high credit rating, efficient operational capabilities and stable cash flows. At the floor price of Rs. 201 for the issue, the stock appears at a discount at FY11E P/B of 2.0x with a stable and superior ROE of 14.4% compared to its peer average (Reliance Infra, Tata Power) at  FY11E P/B of 2.0x with an ROE of 12.5%.

Company	Net Sales (Rs. Crore)	PBIDTM (%)	PATM (%)	P/E*
CESC	3,251.0	25.8%	13.0%	11.7
Torrent Power	4,723.9	23.6%	11.6%	25.2
Tata Power Co.	6,699.0	31.9%	15.4%	29.7
Reliance Infra.	9,966.0	19.2%	12.3%	18.97
NTPC	45,508.3	33.4%	19.1%	19.5 19.0#

Note: All figures are based on TTM ending September 30, 2009 * Based on prices as on February 2, 2010 # On Floor Price of Rs 201/- per share