10 September 2018

NTPC - Value unlocking?

NTPC has characterstics that make it look like a long term value investment. The stock seems to have the potential to double or triple. However, not many will believe the NTPC Multibagger story because the stock never seems to move at all. Would we advice our clients to invest at current price in our core long term portfolio?
I first came across NTPC as a 19 year old while on an audit during my articleship days. The gigantic power plants are a sight to behold (especially at night) but does it become a good long term investment?

About NTPC

National Thermal Power Corporation (NTPC India) is a Maharatna company. The company started in 1975 to spearhead the power development in India. NTPC has a 17.73% share of the country’s installed capacity, and it contributes 24% of the power generation.
NTPC has an installed capacity of 53,651 MW. The breakup can be classified as given below.
The Government of India has a 61.71% stake in the company as on 30th June, 2018, however in June 2016, the Government of India had a 69.96% stake in the company.


The installed capacity has grown as given below over different phases.
India’s per capita consumption of electricity has also grown over the years and this growing trend will continue as a considerable part of time as a large part of the country still does not have acces to 24 x 7 electricity.
Coal based electricity still makes ~ 57.32% of the total installed capacity but renewable sources are grabbing market share.

Replacement Cost

The replacement cost is the cost which will be incurred if the existing assets / capacity of the company are to be replaced. Back in the 1991 days, cement stocks were booming on the back of this “Replacement Cost” theory. We will value NTPC using this replacement cost theory.

NTPC Multibagger – The case

Recently, NTPC announced a Rs 9,300 Crores investment for creating a capacity of 1,320 MW. We can use this data to compute NTPC’s replacement cost value. 
To create a new NTPC it would cost Rs 7.05 Crores per MW but if NTPC itself was to replace old capacities for new capacities then the cost would come to Rs 4 Crores per MW.

Financial Snapshot

As the above snapshot shows, NTPC’s revenues and profits have stagnated. Moreover, with no earnings growth in sight, the valuation multiples will remain low. Also, NTPC has a very low return on equity which is why we will see it trade close to it’s book value range.
Low multiple attract investors but we do not see much in terms of margin of safety at current price. The ideal range to buy NTPC is Rs 120 to Rs 130. However, if there is some trigger which can unleash earnings growth, then NTPC can become a strong cyclical addition to the portfolio.

No comments:

Post a Comment