NTPC: Buy

Investors seeking a defensive play in the run-up to the Budget can consider putting their money into the NTPC stock. The stock is now trading at more reasonable valuations compared to the peak of the market euphoria over power stocks barely a month ago. At the current market price of Rs 197, the stock trades at 20 times the projected earnings for 2007-08; down from over 26 at its height.

While the pace of appreciation from current levels could be slower compared to the recent past, the downside appears minimal. There's likely to be little in the Budget to affect the stock adversely; if anything, it could make things brighter for the company through a sharper focus on the power sector accompanied by higher allocations.

NTPC plans to scale up its present capacity of around 27,000 MW to over 50,000 MW in the next five years. The company will also be commissioning by early-2009 its first hydro power plant at Kol Dam in Himachal Pradesh.

NTPC is an efficient generator when it comes to coal-based stations where its plant load factor is around 93 per cent, but the story is different when it comes to gas-based stations.

Here, the company is plagued by domestic gas shortage and the choice is to either idle the plants or run them on costly imported liquefied natural gas.

The high operating efficiencies translate into a healthy financial position for NTPC. Profit after tax fell 15 per cent in the third quarter ended December 2007 largely due to a higher provision for tax and increased staff costs.

Healthy profitability

Profitability continues to be healthy; the company has maintained a return on net worth in excess of 14 per cent in the last three years.

At an average cost of Rs 1.77 per unit, NTPC's power is very competitive but the cost could increase as newer capacities kick in over the next year.

The company has also begun to address the equipment shortage issue by forging joint ventures with BHEL and Bharat Forge to produce power generation and other equipment.

In the medium to long term, these joint ventures will ensure that NTPC's expansion plans do not suffer for want of equipment.