MOSL: NTPC (Buy)-NTPC to acquire NEEPCO and THDC-Transaction value yet to be finalized
(NTPC IN, Mkt Cap USD15.9b, CMP INR115, TP INR163, 42% Upside, Buy)
Government to sell stake in NEEPCO and THDC
** As part of the Indian government's strategic divestment program, the cabinet has approved the stake sale in NEEPCO (GoI stake: 100%) and THDC (GoI: 74%; UP govt.: 26%) to NTPC (GoI: 54.5%).
** Details on the transaction value though are still awaited. According to our interaction with NTPC, the purchase value for these assets will be decided after an internal assessment. This process could take another 2-3 months.
THDC and NEEPCO: A hydro dominated portfolio
** THDC (~1.5GW) and NEEPCO (~1.45GW) are broadly a hydro dominated portfolio, with combined hydro capacity of 2.3GW (refer exhibits 1/2). Acquisition of the same would increase NTPC's commercial capacity by ~5%.
** THDC - stable portfolio of hydro: THDC operates 1.4GW of hydro plants and ~0.1GW of renewable capacity. According to tariff orders, regulated equity for its hydro portfolio stands at ~INR32b. Adj. profits were at INR8.5b for FY19, implying a core RoE of ~19-20% (base RoE: 16.5%). Overall, RoE is at ~9-10% given CWIP and WC investments.
** NEEPCO - u/r likely denting profitability: NEEPCO's 1.45GW of operational portfolio includes a mix of hydro (0.9GW) and thermal (0.5GW) capacities. According to our analysis of tariff orders, the regulated equity base would stand at ~INR33b. However, annual PAT for NEEPCO stands at just ~INR2b (implied PAT at 15.5% RoE should have been ~INR5b). We believe that this could be led by: (1) F/C under-recoveries for its thermal plants (given actual PAF is lower than normative availability factors) and (2) lower capital costs approval.
NTPC owns and operates power generation plants that supply power to state electricity boards throughout India. Co. also offers consultancy services related to infrastructure sector business such as: Fossil fuel based thermal power plants; Combined cycle power plants; Cogeneration plants; Water supply and treatment and Environment engineering and management. Co. runs a Power Management Institute (PMI), at NOIDA. PMI has over the years trained a number of professionals from Co., State Electricity Boards and other power utilities in the country. Also, participants in PMI programmes have come from various South Asian and Middle Eastern countries.
Motilal Oswal Financial Services Ltd. is a reputed name in Financial Services and Online Trading with group companies providing services such as Private Wealth Management, Retail Broking and Distribution, Institutional Broking, Asset Management, Investment Banking, Private Equity, Commodity Broking, Currency Broking, Principal Strategies & Home Finance.
Motilal Oswal Securities is a group company of Motilal Oswal Financial Service Limited which started as a stock trading company and has blossomed into well diversified firm offering a range of financial products and services. Motilal Oswal has built a reputation as the source for best stock trading company and this has taken a wealth of experience, knowledge and expertise, constantly working in tandem, over the years.
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