INDIA DAILY January 22, 2013 India 21-Jan 1-day1-mo 3-mo Sensex 20,102 0.3 4.5 7.6 Nifty 6,082 0.3 4.0 7.0 Contents Global/Regional indices Daily Alerts Dow Jones 13,650 0.4 3.5 2.3 Nasdaq Composite 3,135 (0.0) 3.8 4.3 Results FTSE 6,181 0.4 4.1 4.8 NTPC: Limited adjustment for a change Nikkie 10,795 0.4 8.6 19.8 Hang Seng 23,567 (0.1) 4.7 8.6 HDFC: Earnings in line; operating trends will be key monitorable KOSPI 1,987 (0.0) 0.3 2.3 Value traded – India Cairn India: In-line results; slower ramp-up in future Cash (NSE+BSE) 139 107 37 Asian Paints: Festive season cheer; we continue to find valuations expensive Derivatives (NSE) 1,054 1,835 1,676 Deri. open interest 1,603 1,667 1,609 Shree Cement: Realizations on shaky ground, power contribution improves DB Corp: Firing on all cylinders on advertising recovery Forex/money market SpiceJet: Beats estimates comfortably Change, basis points 21-Jan 1-day 1-mo 3-mo Economy Rs/US$ 53.7 6 (150) 10 10yr govt bond, % 7.9 - (32) (41) Economy: Golden step in the right direction Net investment (US$mn) 18-Jan MTD CYTD FIIs 221 2,511 2,511 MFs (47) (404) (401) Top movers -3mo basis Change, % Best performers 21-Jan 1-day 1-mo 3-mo RCOM IN Equity 89.0 6.8 22.4 48.6 IDEA IN Equity 119.6 2.0 22.5 47.0 UT IN Equity 38.2 (1.7) 16.7 46.7 UNSP IN Equity 1808.6 0.4 (6.5) 40.0 IBULL IN Equity 330.0 0.3 22.2 38.4 Worst performers BHFC IN Equity 246.8 (1.0) (4.0) (18.2) MMTC IN Equity 602.9 (1.3) (6.6) (16.4) EDSL IN Equity 134.0 (1.8) (6.5) (16.1) NMDC IN Equity 161.8 0.1 2.2 (13.1) CRG IN Equity 114.0 0.0 0.8 (12.8) For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL. ADD NTPC (NTPC) Utilities JANUARY 22, 2013 RESULT Coverage view: Attractive Limited adjustment for a change. NTPC’s adjusted profits of Rs25.5 bn yield a Price (Rs): 162 reasonable 10% yoy growth in earnings, aided primarily by 7% yoy growth in Target price (Rs): 180 generation on an expanded capacity base. Absence of significant non-recurring BSE-30: 20,102 adjustments (Rs0.4 bn in 3QFY13) was a marked difference from past results. Improved pace of capacity addition (3 GW up to 3QFY13) and a resilient business model increase visibility of the curtailed XIIth plan targets. Maintain ADD rating and TP of Rs180/share. Company data and valuation summary NTPC Stock data Forecasts/Valuations 2013 2014E 2015E 52-week range (Rs) (high,low)191-137 EPS (Rs) 13.3 13.9 14.7 Market Cap. (Rs bn) 1,332.5 EPS growth (%) 22.8 5.0 5.7 Shareholding pattern (%) P/E (X) 12.2 11.6 11.0 Promoters 84.5 Sales (Rs bn) 661.4 742.6 766.8 FIIs 4.0 Net profits (Rs bn) 109.4 114.9 121.5 MFs 1.0 EBITDA (Rs bn) 189.2 216.8 232.4 Price performance (%) 1M 3M 12M EV/EBITDA (X) 8.8 7.6 6.9 Absolute 5.5 (2.8) (7.4) ROE (%) 14.2 13.7 13.2 Rel. to BSE-30 1.0 (9.7) (22.9) Div. Yield (%) 2.5 2.6 2.7 Steady operational performance, adjusted PAT grows 10% yoy NTPC reported revenues of Rs157.7 bn (3% yoy, -2% qoq), operating profit of Rs40 bn (23% yoy, -5% qoq) and net income of Rs26 bn (7% yoy, -17% qoq) against our estimate of Rs168.7 bn, Rs38 bn and Rs26 bn respectively. Accounting for limited prior-period adjustments of Rs0.4 bn during this quarter (Rs13.3 bn in 2QFY13), adjusted sales and net profits were Rs157.3 bn and Rs25.5 bn respectively. Revenue miss was primarily on account of lower fuel costs (-8% qoq), typical of the cost-plus scenario, even as generation continued to improve (7% yoy, 12% qoq). Highest-ever capacity addition achieved so far in 2013, improving PLFs may allay concerns NTPC has so far commissioned a total of 3,160 MW coal based capacities—2,160 MW at the standalone level and 1,000 MW under JVs/subsidiaries. NTPC looks reasonably on target to add another 3 GW in FY2014E as well, maintaining the improved pace of capacity addition. We note that NTPC reported improved utilization (PLFs) for its coal-based capacities—84.1% in 3QFY13 compared to 80.6% in 1HFY12, partially allaying concerns on the drop in utilization rates. We further highlight that under the availability-based tariff structure (implemented post-FY2009), the incentive structure is less aligned to actual generation as was the case prior to FY2009. We retain our ADD rating with a TP of Rs180/share We retain our ADD rating on NTPC as newly commercialized capacities of ~3.2 GW improve visibility for continued earnings growth. NTPC is currently trading at 1.5X FY2014E book value and 12X FY2014E EPS—at the lower end of its historical band (see Exhibits 5 and 6). We note that the recent underperformance primarily reflects uncertainty around the pricing of the potential follow- on offering and offers over 10% upside to our fair value estimate of Rs180/share. We have revised our FY2013E (+4.6%) estimate to Rs13.3/share accounting for aggressive commercialization of capacities and improved generation, while our earnings for FY2014E (+1.9%) remain largely unchanged. For private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. NTPC Utilities Exhibit 1: Net profits in line with estimates, higher operating profits partially offset by higher depreciation and interest Interim results for NTPC, March fiscal year-ends (Rs bn) (% Chg.) 3QFY13 3QFY13E 3QFY12 2QFY13 3QFY13E 3QFY12 2QFY13 FY2012 FY2013E (% Chg.) Net sales 157.7 168.7 153.8 161.2 (6) 3 (2) 620.5 661.4 7 Operating costs Cost of fuel (101.0) (111.2) (106.5) (99.3) (9) (5) 2 Personnel costs (6.9) (9.0) (7.8) (9.0) (23) (12) (23) Other expenses (9.9) (10.5) (7.0) (10.7) (6) 40 (7) Total expenses (117.8) (130.7) (121.4) (119.0) (476.8) (500.1) EBITDA 40.0 38.0 3 2.4 42.2 5 23 (5) 143.7 161.3 12 EBITDA margin (%) 25.3 22.5 21.1 26.2 23.2 24.4 Other income 7.5 10.5 10.1 10.5 27.8 34.3 Interest & finance charges (5.3) (5.5) (3.3) (3.0) (24.3) (20.2) Depreciation (8.3) (8.3) (6.6) (7.9) (27.9) (32.3) PBT 33.9 34.7 3 2.6 41.8 (2) 4 (19) 119.3 143.1 20 Provision for tax (net) (7.9) (8.7) (8.3) (10.4) (31.0) (34.5) Net profit 26.0 26.0 2 4.2 31.4 (0) 7 (17) 88.3 108.6 23 Extraordinary — ——— — — EBITDA margin (%) 25.3 22.5 21.1 26.2 23.2 24.4 Tax rate (%) 23.4 25.0 25.6 24.9 26.0 24.1 Source: Company, Kotak Institutional Equities estimates Exhibit 2: Limited adjustments in 3QFY13 (adjusted sales of Rs157.3 bn versus reported sales of Rs157.7 bn) One-offs and prior-period adjustment for 3QFY13 results (Rs bn) Adjustments Comment 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 Impact on (1) Prior period sales Included in current sales 7.6 (1.6) 1.8 1.1 10.2 0.3 Sales and PAT On account of tariff amendements Included in current sales 0.0 0.0 0.0 0.0 0.0 0.0 Sales and PAT (2) Tax recoverable from customers in sales Income tax Included in current sales 0.5 (4.1) 0.9 (0.6) 2.9 0.0 Sales and PAT Deferred tax Included in current sales 0.1 0.1 0.1 0.1 0.1 0.1 Sales and PAT (3) Tax expense for prior period Prior period tax in current year's tax 2.7 (3.1) (0.0) 0.5 0.0 0.0 PAT (4) Fuel Expenses prior period Due to revised GCV based pricing PAT (5) Interest and finance cost Arising out of exchange difference 2.4 0.4 0.0 0.0 1.9 0.0 PAT (9) Other expenditure Forex translation —————— PAT Total adjustments-Sales 8.2 (5.5) 2.9 0.6 13.3 0.4 Adjusted Sales 145.6 158.9 164.3 159.0 147.9 157.3 Total adjustments-PAT 8.0 (2.0) 2.9 0.2 15.3 0.5 Adjusted PAT 16.2 23.3 19.1 24.8 16.1 25.5 Source: Company, Kotak Institutional Equities 3QFY13 results—financial and operational highlights ` Reported sales of Rs157.7 bn had minimal adjustments of (1) Rs0.3 bn (Rs10.2 bn in 2QFY13) from prior-period revenues, and (2) Rs0.1 bn (Rs2.9 bn in 2QFY13) of income tax recoverable from consumers. ` With the commissioning of Vallur Unit 2 (500 MW) and Jhajjar Unit 3 (500 MW) in 3QFY13, NTPC (including JVs and subsidiaries) has commissioned new capacities of 3,160 MW and commercialized new capacities of 3,820 MW so far in FY2013.