Floor Price    :  Rs. 201 No of Shares  (FV Rs.10)  : 412 million shares Issue Size     :  Rs. 82,812 million ( based on Floor Price ) Issue Opens-Closes  :  03rd February 2010 – 5th February 2010 Listing    :  BSE and NSE

Pre-Issue Promoter Holding   : 89.5 per cent Post Issue Promoter Holding   : 84.5 per cent Post Issue Equity Capital   : Rs.82,450 million Post Issue Equity Shares (nos)    :  8245 million shares Market Cap    : Rs. 16,57,245 million  (at floor price) EPS (Annualized FY10)  : 11 P/E Ratio     : 19

BUSINESS MODEL:

With 18.6% of the total installed capacity and 28.6% of the total power generation of India ( as on September 2009), NTPC, a Navratna company, is India’s largest power generating company.

Its total installed power generation capacity is 30,644 MW, of which 93% is owned capacity while the rest are driven through Joint Ventures. 86% of this is coal-based, operated through 15 coal-based power stations, and 14% is gas-based, operated through seven gas-based power stations (including one naphtha-fired station).

As of September 30, 2009, NTPC has added 3,240 MW during the Eleventh Plan, and is  presently engaged in construction activities for projects representing 17,930 MW (including 4,000 MW undertaken through joint venture companies). The company aims to achieve 75,000 MW capacity by Fiscal 2017. The company is also engaged in power trading through our wholly owned subsidiary, NVVN, which was incorporated in November 2002.

Positives

• High Plant Load Factors ( PLF): In Fiscal 2009, NTPC’s coal-based stations operated at an average availability factor of 92.5%, and achieved an average PLF of 91.1%, compared to the all-India average PLF for coal-based stations of 77.2%. In Fiscal 2009, of the 15 coal-based power stations, four operated at a PLF of greater than 95.0% and one operated at a PLF of 99.4%. In Fiscal 2009, the gas-based stations operated at an average availability of 86.7% and an average PLF of 67.0%, compared to the all-India average PLF for gas-based stations of 57.6%. PLF of NTPC’s gas-based stations has improved to 78.4% in the first half of Fiscal 2010 due to increased gas availability. Its average selling price of electricity was Rs. 2.12 per unit in Fiscal 2009. This indicates high operational efficiencies.
  
  
• Secured Sales Agreements: Currently, all the sales of electricity are made pursuant to long term PPAs. More than 90% of its sales are to SEBs and state owned distribution companies for which payments are secured through LCs and the Tripartite Agreements (“Tripartite Agreements”). For private distribution company customers, payments are secured through letters of credit backed by a first charge created on their receivables in the company’s favour. This secures its income against bad debts.
  
  
• Merchant Sale Boost: The Government has recently proposed to earmark 10 per cent  of the NTPC's total capacity for merchant sale. Under this process, NTPC would be able sell power at market driven rates in the open market (through merchant basis). As the rates for Merchant sales of power is higher as compared to the long-term tariffs or PPAs, it will have a positive impact on the bottomline of the company and also its margins.
  
  
• High Revenue Visibility: Government of India (GoI) being the promoter of the company, NTPC enters into a Memorandum of Understanding with the GoI for its annual performance targets. For its coal-based stations, the term of the PPA for most stations is 25 years, while for its gas-based stations, the term of the PPA for most stations is 15 years. For Hydroelectric Projects it is 35 years. As on 31st March, 2009, the entire output of the company’s power stations has been contracted for, under these PPAs. This provides high revenue visibility.
  
  
• De-Risking through Diversification: The company has initiated concrete efforts towards diversification of its product mix. It is currently constructing hydroelectric power projects. As of September 30, 2009, 1,920 MW of capacity is under construction and 552 MW is under bidding. It aims to have 9,000 MW by Fiscal 2017 and another 1000 MW of power from renewable energy projects. In the long run, this will de-risk the company’s business model.
  
  
  It has a power trading subsidiary, NVVN, which has grown to become the second largest power trader in India. In order to incentivize the development of solar power in India, the GoI has designated NVVN as the nodal agency for the purchase of up to 1,000 MW of solar power commissioned by Fiscal 2013 under the National Solar Mission and sale after bundling an equivalent MW capacity from its stations.
  
   
  If the plans progress as planned, the company’s business model would be fairly diversified.
  
  
• Backward Integration: The company has been awarded eight coal mining blocks by the GoI, including two blocks awarded for development under a joint venture with Coal India Limited. This enables it to secure fuel security. Further the company has ventured into equipment manufacturing, to ensure the supply of critical equipment and spare parts, and an electricity distribution business. As and when this progresses, it will have better control over its costs.
  
  
• Fuel Security: As of September 30, 2009, the company has signed long term Coal Supply Agreements covering 12 of it 15 coal-based stations. It has also executed gas supply agreements with GAIL for the supply of gas for our gas-based power stations, which are valid up to 2021.
  
  
• Proximity to Fuel Sources: Over 86.0% of the total generation capacity is coal based, and ten out of 15 of coal-based stations, representing 83.0% of its total coal-based capacity is located in the range of 7 to 80 kilometres from the coal mines that supply them. The company has its own Merry-go-Round (MGR) rail system for transporting coal from the coal mines to the generating stations. Further, all the gas-based stations are located along major gas pipelines. This results in efficient supplies and lower transportation cost for the company.
  
  
• Tax Benefits: The company enjoys several tax benefits on account of its presence in the power sector which is a crucial segment of the infrastructure industry.

CONCLUDING NOTES

At the floor price of Rs. 201, NTPC trades at a PE of 19 of its FY 2010 earnings,  which is not steep  when compared to most of its peers (28 for Tata Power, 47 for JSW Energy).  Even on the Price to Book parameter, NTPC scores over its peers. NTPC’s P/B ratio stands at 2.9 while that of Tata Power is at 3.5 and JSW Energy is 3.7.

In fact, most of the recently IPOs in the Power sector, commanded a hefty premium without having any capacities worth discussing in place. NTPC not only has efficient plants in place, but is also the undisputed market leader by a mile.

Further, NTPC’s FPO is being made using the French Auction model for institutional investors. Under this model, institutional investors can bid above the floor price and the allotment would be on a price priority basis. This mechanism will enable NTPC to get a better price for its shares and maximize its proceeds from the FPO. This process is based on the principle ‘Higher the Bid, higher the Allocation’.

Hence, there is a probability of not just a healthy price discovery by Institutional Investors but the emergence of strong hands holding the stock that could cap its downside risk.

Besides being the single largest beneficiary of potency of the power sector in India, the  positives  in this FPO far outweigh the  negatives.

To sum up, discerning investors with a time frame of 15-18 months can consider full participation in this FPO.

 

theIPOguru’s  Verdict  :

INVESTOR TYPE