The stock of NTPC Ltd has been slaughtered, losing around 35% from its 52-week high hit on 15 January. Forget the Sensex, it has underperformed even the BSE Power index over the period. A big reason is that it was a major beneficiary of the earlier euphoria in power stocks, moving up 68% between September and January. A lot of the so-called rerating of the sector as a result of the Reliance Power Ltd issue had rubbed off on the NTPC stock. It’s now paying the price.
The good news is that the company’s plans for capacity additions [22,000MW in the 11th Plan (2007-12) period] are on track. It plans to add 2,490MW capacity this fiscal year, of which more than 500MW has already been commissioned. Construction is proceeding for 17,350MW and orders for the balance is to be placed in the next two or three months. But all this is already in the price of the stock.
A number of joint ventures are on the anvil, including the latest announcement of a deal with Bharat Forge Ltd to make power plant components. But these long-term plans have had little impact on the scrip.
Net profit during the December quarter was lower by 15.3% compared with the year-ago period. But that’s because reported employee cost jumped 71% on account of a provision for wage revision made during the quarter. At present, only a provision has been made, but when the wage hikes come through, the cost will be a pass-through one. Once such exceptional items are excluded, net profit growth was 10% y-o-y, just slightly lower than estimates.
However, availability of gas has impacted the generation and plant load factor of its gas-based plants. Also, acquisition of land for captive coal mining has been delayed—the acquisition for the first such mine has been delayed beyond a year.
NTPC’s attraction lies in its assured post-tax return on equity of 14%, with most costs being a pass-through. For such stocks, what matters is volume growth, which NTPC has in plenty.
But at current levels, it quotes at around 2.6 times fiscal 2009 estimated book value, which is not cheap for a utility.
Domestic market to the rescue of IT vendors?
Nasscom, the industry body for the Indian information technology (IT) and business process outsourcing (BPO) businesses, has reiterated its target of $60 billion (Rs2.38 trillion) worth software and services exports in fiscal 2009-10. This implies an average growth of just 22% in the next two financial years, since the industry is estimated to close this fiscal with revenues of $40.3 billion.
Growth has already dropped to 28.8% this fiscal year, based on the estimates released this week, from 33% in the previous year. But analysts aren’t worried, citing that an ever-increasing base is bound to result in lower percentage growth numbers. Revenues have more than trebled from under $13 billion four years ago. Along with the high base, IT services vendors are grappling with the high possibility of a slowdown in the US, which accounts for 61% of the industry’s exports.
According to Forrester Research, global spending on IT goods and services is expected to grow at half the rate this calendar year compared with last year. Given this background, the estimated growth of 22% over the next two years would be decent, says a fund manager with a private sector mutual fund. Also, top-tier IT stocks trade at 18-19 times their trailing earnings, so any growth higher than that would be a bonus.
While the outlook on software exports growth is relatively bleak at present, IT vendors can take heart from the opportunities in the domestic market. The software services and BPO market is estimated to have grown by 42.7% this fiscal year, although this comes off a much lower base—note that growth had been much lower at 22.4% in the previous fiscal year. The domestic market accounted for 28% of the industry’s incremental revenues this fiscal year, based on Nasscom estimates, up from just 16% a year ago.
With growth in Indian industry continuing at a reasonably fast pace, increase in domestic IT spend should also pick up. There have already been some large outsourcing deals handed out by Indian firms, the likes of which should increase over time, as they get comfortable with the idea of outsourcing IT requirements. According to a Gartner survey, Indian companies report stronger than average IT budget increases of 13% versus the world average of 3.3% for 2008. True, pricing and profitability are not as attractive as deals dome overseas, but given the possibility of a drop in IT spend and price cuts by overseas clients, the Indian market can’t be ignored much longer.
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