Such have been NTPC Ltd’s woes in the past year that it even underperformed the BSE Power index, let alone the broader market. Since January 2012, the company’s shares lost about 5% of their value compared with a 26.3% gain in the Sensex. However, on the flip side, the resultant low valuations plus promises of better earnings powered by capacity addition have made the stock attractive. At the current price, the stock trades at 1.3 times its estimated book value for FY14 against an average 1.8 times in recent years.
That, together with upgrades by brokerage firms—most notably HSBC and Morgan Stanley on Thursday—meant that the government was able to cover its offer for sale by a wide margin.
NTPC plans to add 14 gigawatts (GW) of capacity in the 12th Five-Year Plan (2012-17). After some hiccups, capacity addition has speeded up in recent times. In the first nine months of this fiscal year, the firm commissioned 3.3GW. According to Edelweiss Securities Ltd, NTPC will add about 60%, or 8.4GW, of its planned capacity in the first two years of this Plan, thus increasing its earnings visibility. Some of this was already visible in the December quarter results when the firm reported a 6.6% increase in power generation compared with a 3.6% year-on-year gain in the three months ended September.
The government has done its bit as well, like, for example, announcing the plan to restructure state electricity boards, which should increase power offtake. Secondly, allowing pooling of coal prices should allay some concerns about fuel supply. Note that when the government first mooted this offer for sale in November, it had separately re-allocated three coal mines to the power company that it had earlier taken away.
But the gains from all these measures will take a while to materialize. As can be seen from Coal India Ltd’s story, it is difficult to develop coal mines in this country. The price pooling is still to go through a couple of stages of debate and approval before it comes into effect.
Inadequate fuel supply leading to lower capacity utilization was one of the reasons for NTPC’s less-than-attractive profitability ratios in recent times.
In the final analysis, while the improving capacity additions might arrest a further decline in the stock price, any significant upside might take some time in coming, given the structural problems surrounding the power sector.