Background & Business

National Thermal Power Corporation (NTPC), promoted by Government of India (GoI) in 1975, is the largest power generating company in India. As of March 31, 2004, the company had installed capacity of 21,435 MW representing approximately 19.1% of India’s total installed capacity. Given its higher than average level of operational efficiency (measured in terms of plant load factor PLF), it contributed 26.7% of the total power generation of India during fiscal 2004.

NTPC owns 13 coal-fired power stations and seven gas-fired power stations spread across the country. In addition to this, it also operates 314 MW of capacity through three joint venture projects and manages 705 MW power station owned by the Government. Around 82% of the current capacity is coal-fired plants with 18% coming from gas-fired plants. As per a study conducted by AT Kearney in 2002 placed NTPC among the ten largest thermal generators in the world in terms of generated output.

Issue objective

The public offer is an equal mix 43.29 crore equity shares of fresh issue and offer for sale (by GoI) each, totalling to total issue size of 86.583 crore equity shares. About 2.06 crore equity are reserved for the employees of the company. Currently, it is fully owned by GoI and post-issue the government holding will come down to 89.5% of the diluted (expanded) equity capital of Rs 8245 crore.

The proceeds of the fresh issue will be utilized to fund the expansion of generation capacity (by 6690 MW) through six power projects and general corporate purposes. These six projects are:

• Rihand Super Thermal Power Project, Stage II – 1,000 Mw
• Vindhyachal Super Thermal Power Project Stage III – 1,000 MW
• Kahalgaon Super Thermal Power Project – 1,500 MW
• Sipat Super Thermal Power Project, Stage I – 1,980 MW
• Sipat Super Thermal Power Project, Stage II – 1,000 MW
• Feroze Gandhi Unchahar Thermal Power Project, Stage III – 210 MW

The total approved cost of these six power projects is Rs 26,824 crore of which around Rs 4,100 crore has already been incurred as on August 2004. NTPC has existing unused debt facilities of Rs 10,810 crore for these projects and aims to ridge the gap of Rs 11,900 crore through fresh issue, debt and internal accruals.

Capacity expansion targets

In fiscal 2004, demand for electricity exceeded supply by an estimated 7.1% in terms of total requirements and 11.2% in terms of peak demand requirements.

Country Per Capita Electricity Consumption in 2000 (units)

Source: U.N. Development Programme, Human Development Indicators 2003.

Given the continued demand-supply gap of electricity in India, the target for capacity addition has been set at 41,110 MW under the Government’s Tenth Plan (fiscal 2003-2007). Under the Plan, state-owned power companies are to implement 22,832 MW of the targeted capacity expansion, of which NTPC has been allocated 9,370 MW. It has already commissioned 2000 MW, and construction activities for projects representing 6,370 MW are in different stages of progress.

The planned capacity addition during the Government’s Eleventh Plan (fiscal 2008-2012) is 11,558 MW, of which NTPC has commenced work on 2,120 MW. In addition to increasing the capacity, the company plans to diversify its operations by taking advantage of opportunities created by regulatory and economic reforms. It has entered into the power trading business (NTPC is co-promoter of Power Trading Corporation) and considering downstream integration into the electricity distribution business.

Strengths

High operational efficiency: In fiscal 2004, the average availability of coal-fired plants (excluding two plants taken over from other generators, which are undergoing renovation and modernisation) was 88.8% and average PLF was 84.4%. This compares favourably to the all-India average PLF for coal-fired plants of 72.7% in fiscal 2004. The monitoring and maintenance techniques provide the required competitive advantage to NTPC, which is important as reliability and maintenance costs are a significant determinant of profitability. In fiscal 2004, the average selling price of electricity per unit was Rs. 1.27 for coal-fired stations and Rs. 2.41 for the gas-fired stations making NTPC as the most competitive source of bulk power supply in India.

Proximity to fuel sources: Most of our coal-fired stations are located close to the coal mines that supply coal to the plants, which helps reduce supply interruptions and transportation costs. Most of our gas-fired stations are located along major gas pipelines. We believe that our proximity to our primary fuel sources is one of the key factors enabling us to generate electricity at rates, which are among the most competitive in India

Established track record in implementing new projects: NTPC has been able to continuously reduce the project implementation time. It has been able to commission 500 MW Talcher project in 38 months as compared to around 55-60 months taken earlier.

Strong financial position: In spite of operating in a highly capital intensive industry, the company had relatively low debt-equity ratio of 0.43 as on March 2004 and generated net cash of over Rs 5,800 crore from its operations in FY04. It also has reasonably good weighted average cost of debt at 6.95% in FY04.

NTPC’s domestic bonds were given the highest credit rating of AAA by CRISIL or LAAA by ICRA, and Eurobond offering in March 2004 received a BB rating from Standard & Poor’s and BB+ rating from Fitch, which was equivalent to India’s sovereign rating.

Concerns

Lower tariffs: The CERC has issued new tariff regulations for the period from April 1, 2004 to March 31, 2009. Under the regulations, the post-tax rate of return on equity has been reduced to 14% from the 16%, which was applicable till March 31, 2004. This apart, incentive benchmark for plant efficiency is raised from PLF 77% to 80% now. The impact is clearly visible in first quarter’s performance. Although the number of units sold grew by 11.6%, revenues from the same increase by 8.3% only due to lower tariffs accrued to the company.

Receivables woes: The state electricity boards (SEBs) are the largest purchasers of power from us and accounted for over 99% of the sales and given the financial health of SEBs the recover of dues have been quite difficult in the past. However, the one-time settlement of accumulated losses of SEBs through securitisation improved the recovery of dues to 100% in FY04.

But unfortunately, the political gimmick of offering free power to farmers across various states is threatening to undo the restructuring of SEBs and push them into huge losses again. This is likely to eventually reflect on recovery of dues payable to NTPC by SEBs.

Valuation

NTPC is the largest power generation company in the country. It is expected to play pivotal role expansion of generation capacity to narrow and eventually bridge the demand-supply gap in the crucial infrastructure industry. In terms of market capitalization, the scrip will be the fourth largest on the domestic bourses.

At the offer price band of Rs 52-62 the scrip is offered at discounting of 10.8 to 12.8 times its FY04 earnings of Rs 4.84 per share on post issue expanded equity base of Rs 8245.5 crore. It is priced at 1.14 to 1.36 times its FY04 book value of Rs 45.5 per share. We recommend subscribe rating on the issue.

Financial Snapshot