Goldman Sachs puts buy on NTPC

Goldman Sachs puts buy on NTPC

RESEARCH: Goldman Sachs RATING: Buy CMP: RS 179

Goldman Sachs maintains its earning estimates of NTPC and `Buy’ rating on the stock. The 12-month target price of Rs 208 is the value of its FY2010E financial assets (Rs 37/share) plus the value of its operating assets using a residual income (RI) model (Rs 171/share). India’s central electricity regulator (CERC) has announced the final tariff norms for generation and transmission projects for FY2010-14 . Takeaways for NTPC - [1] Minimum regulated post-tax ROE (return on equity) raised from 14% to 15.5% (16% in case of new projects completed within prescribed time). [2] Benefit of tax holidays to be retained, but tax on incentives will not be a pass-through . [3] Fixed-cost recovery linked to ‘plant availability’ and not utilisation rate (PLF or plant load factor). [4] Option to avail R&M (repairs and maintenance) allowance for more than 25-year-old units. [5] Normative levels for operational and working capital parameters have been tightened. [6] Depreciation rate for tariff setting largely aligned with accounting norms. Prima facie, CERC’s final tariff norms for FY10-14 are neutral-to-positive for NTPC’s earnings outlook; consensus expected them to be neutral-to-negative . We maintain that [1] effective tax rate and, [2] economic life of projects, are critical parameters to assess NTPC’s profitability during FY10-14.