NTPC: Buy
Investors looking for a defensive play in the current market can buy the stock of National Thermal Power Corporation (NTPC), trading at Rs 150 (price earnings multiple of 13). The stock has managed the market storm relatively better than many others. Compared to a fall of 43 per cent in the broad market (Sensex), it is down by 18 per cent only since mid-August. The market’s attraction for NTPC stems from three main factors — the large demand-supply gap for power, the company’s efficient operating profile and its emerging integrated business model with entries into coal mining and power trading.
The power major’s plant load factor (PLF) of 87.5 per cent in the first half of this fiscal, though marginally lower than the same period last year, is still way ahead of the industry average. PLF, despite the addition of fresh capacity of 1,000 MW since the same period last year, was affected due to maintenance shutdowns at some of its stations and also fuel scarcity.
While the company has addressed the fuel problem by ordering imports of 8.6 million tonnes of coal, gas remains a cause for worry. The imbroglio over gas supply for its current and expanded capacity at its gas-based stations in Kawas and Gandhar is pulling down the overall PLF of NTPC. The company has now switched to naphtha following the fall in price of the liquid fuel, but that may be a temporary solution.
It is steadily moving ahead in its backward integration into coal mining, the fruits of which will begin to be visible over the next few years. Meanwhile, of the 22,430 MW planned to be added in the Eleventh Plan (2007-12), NTPC has commissioned 2,490 MW while 16,180 MW are in various stages of construction. The company may yet fall short of the target given that about 2,600 MW of gas-based capacity is included in it.
The capital expenditure programme continues to be on track with an estimated Rs 12,670 crore to be spent this fiscal followed by Rs 18,700 crore in 2009-10. The company recently raised Rs 1,000 crore through bonds from the market at average rates of about 11 per cent even in the current tight liquidity scenario. Weighted average cost of the company’s total borrowings, at 7.2 per cent, is still on the low side.
Profits have grown at 15 per cent compounded annually in the last five years. In the first half of this fiscal, the unadjusted profit has fallen by 10.67 per cent year-on-year but the adjusted profit shows a growth of 8.64 per cent. In the same period, revenues have grown by 13 per cent, mainly owing to capacity addition, leading to higher generation.
Indraprastha Gas: Buy
Not too many stocks have held their ground in the meltdown of the last three months. Indraprastha Gas Ltd. (IGL) is one of them. Compared to the 43 per cent erosion in the Sensex since mid-August, the IGL stock has shed just 7 per cent with a low of Rs 98 and a high of Rs 121.
Though FIIs hold about 20 per cent of IGL’s equity, the stock has managed to stay afloat only because there are little concerns over its earnings prospects. Indeed, the stock is seen as a defensive bet during bad times such as these as its revenues and earnings are not directly linked to the economy.
The downside from the current price of Rs 104 appears minimal. Traditionally, the IGL stock has not been a fast mover during an uptrend and, as such, it will be fair to expect an upside of 15-20 per cent in the next one year, which is a reasonable return in the prevailing market. The dividend yield of about 4 per cent on the stock is a plus.
Recession-proofIGL, which supplies compressed natural gas (CNG) for automobiles and piped natural gas (PNG) to homes and commercial units, is a monopoly in Delhi. Commercial vehicles in the National Capital Region are bound by law to use CNG as fuel. However, it is the private vehicles that are now driving IGL’s growth.
The number of CNG vehicles on Delhi roads rose 71 per cent to 1.21 lakh vehicles in 2007-08 with most of the increase coming from private vehicles and some from buses. CNG sales from its 163 stations accounts for 92 per cent of revenues with the rest coming from PNG.
The high prices of petrol and diesel are behind the rising conversion of private vehicles to CNG. There is a big benefit for vehicle owners even after accounting for costs of conversion, given the wide gulf between the prevailing prices of petrol/diesel and CNG.
IGL sells CNG at Rs 18.90 a kg while petrol costs Rs 50.62 a litre and diesel Rs 34.86 in Delhi. During the second quarter alone, about 15,000 cars and 300 buses were converted to CNG.
IGL has an allocation of 2.2 million standard cubic metres of gas a day (MMSCMD) from its parent Gail. Its average sales were 1.5 MMSCMD by end-March; given the increasing trend in conversion since, IGL must now be averaging about 1.7-1.8 MMSCMD of sales a day. There is still enough room in the allocated supply for IGL to expand its sales.
Growth driversIGL plans to build 50 more stations by 2010 in time for the Commonwealth Games which is expected to spur higher demand for CNG. The company is also planning to branch into adjoining territories such as Greater Noida, Ghaziabad and Panipat.
The company has jointly bid with a private player — Siti Energy — for marketing rights in Haryana. Approval from the regulator — Petroleum and Natural Gas Regulatory Board (PNGRB) — is awaited.
Meanwhile, a decision by the Delhi Government to stop registration of diesel-driven small cargo carriers is expected to benefit IGL. Combined with the rising conversion rate of private vehicles and buses, IGL appears to be well-placed in terms of volume growth. There is also tremendous scope in PNG where the penetration rate is estimated to be less than 1 per cent. Though it is a time-consuming process to network residential and commercial units, once done, the business can add significant incremental volumes for IGL.
Growth barriersThe two most formidable barriers that IGL could run into are access to gas and regulatory norms. The company will soon be using up its full allocation of gas. Though new gas from the KG Basin is expected to flow, the price may not be as low as the artificially set APM price that it now pays.
While ordinarily it should be able to pass on the higher price, it needs to also keep an eye on the price of competing fuels. This will be the case especially in the new markets that IGL intends to enter where there will not be any mandate, as in Delhi, for vehicles to use CNG only.
Second, there are regulatory uncertainties with the PNGRB and IGL yet to settle the question of licence for Delhi. While IGL claims that it was formed before the regulator came into existence and, hence, the latter’s norms are not applicable to it, the PNGRB insists that IGL has to secure a licence from it. Meanwhile, the regulator has set till 2010 for IGL’s Delhi monopoly status to end.
Zero-debt companyIGL is well-placed to raise funds for expansion, given its zero-debt status. The company plans to invest Rs 500 crore over the next two years in expanding its network in Delhi. Revenues and earnings have been growing steadily; in the latest quarter, revenues grew by 22 per cent to Rs 243 crore while earnings rose 17 per cent to Rs 50 crore.
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