Wednesday, December 23, 2009

[Investors] NTPC allowed to sell part capacity in merchant market? Positive news flow built up before FPO ??????????

Media reports suggest that Central Utilities (NTPC, NHPC, Neyveli, DVC etc) might be allowed to sell part (25%) of there central quota (15% of overall supply) in the merchant market. This works out to ~4% of overall Power supply of the utilities. In our view the motive behind such a move could only be - increasing the volumes in the merchant market, thereby reducing the volatility & bringing down the merchant prices. The motive cannot be to increase the profitability of already highly profitable (NTPC's core ROE -27%) regulated projects. Assuming that this proposal comes through (thin possibility), there could be four possibilities.

(1)   NTPC allowed to retain additional profits – Current ROE of about 27% to increase to 33% (Assuming merchant rate of Rs4/Unit). However, in our view this is not likely to be the case as the motive cannot be to increase the profitability of already highly profitable (NTPC's core ROE -27%) regulated projects.

(2)  Central Government retaining the additional profits. However this move would face tremendous opposition from states & would not incentivize states where the project is put up - to speed up the regulatory clearances and allocate Greenfield projects.

(3)   Additional profits being passed on to states, but central Govt is unlikely to do so.

(4)   Sharing between Central and State Govts. – The most likely option.

We understand that NTPC's FPO is due next month and there might be possibilities of positive news built up for the stock. Our channel checks suggest a possible FPO pricing of Rs260-270/Share.

In our view, there could be some positive news flow built up before FPO but we don't expect any significant positive impact on NTPC's numbers. However, this could lead to a short term spike in the stock price in the short term. In the long-term we maintain our view that NTPC stock is expensive at current valuations of 2.8xFY11E Book Value, with sustainable Reported ROE of 15% and 10-yr Treasury bond yield at 7.5%.

Current power allocations

Currently, out of 150000MW, 40000MW is the capacity of central Utilities. 85% of 40000MW is already allocated to states (10% to home state and 75% to states on the basis of there consumption) and 15% power is kept unallocated for the central pool, which is currently allocated based on the short term and medium term needs of different states. There has been a push from the central utilities side (since long) to increase the allocation for the Home states. This was to provide some more incentives to speed up the allocations of green field projects and regulatory clearances, land acquisition from the state's side.

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