Long-term investors should look to buy NTPC on falls

MUMBAI: NTPC has been improving its operational performance for the past few quarters and the June quarter was no exception. Its earnings grew at a betterthan-expected 15% year-on-year led by 10% power generation growth. Its other income, which includes treasury income, fell by 38% as the company used cash to increase capacity.

Analysts consider this as a positive sign since increased capacities will help in improving return on equity to 15.5% as against around 8-12% returns that can be generated from treasury operations.
In the June quarter, it added 575 MW that includes commercialisation of 250 MW solar capacity and acquisition of a thermal power plant of 325 MW in Jharkhand. “Although small in size, they could help improve capital allocation and return profile of the company ,“ said Murtuza Arsiwalla, power analyst with Kotak securities, in a report.

Analysts project 12-15% earnings growth over the next three years compared with the earnings drop of 9.4% n FY14, another fall of 12.4% in FY15 and a modest growth of 2% in FY16. The dismal perfor mance was due to lower power demand from he financiallyweak state-owned electric ty distribution companies and lower fuel availability.

NTPC's improving plant load factor (PLF), or capacity utilisation, reflects improving demand while higher plant availability factor (PAF) shows better fuel availability. Its coal imports have become almost nil, thanks to the improving supply from Coal India. PLF of the coal fired plant improved by 377 bps o 81.4% and PAF was 90.4%, much higher than the expected levels of 83% by clients.

Price to book value is a common ra io used to value power stocks. In good imes, the stocks are awarded higher price-to-book ratios. Book value is the nitial shareholders capital plus the accumulated profits. So, with higher earnings, the book value should grow and so will the stock's perceived valu ation by analysts.

At the Tuesday's closing price of `158.8, the stock is trading at 1.4 times its estimated FY17 book value. In the past, NTPC has also traded at 2 times the book value, which means there is room for upside.

The September quarter may not be as exciting for the company , given that industrial activity is lower during monsoon season. But for long-term investors, any major fall in the stock price will be an opportunity to buy .