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JP Morgan on NTPC + HDFC Bank

October 15, 2007

NTPC: JP Morgan [JPM] initiates coverage on NTPC with Neutral rating and Rs228 DCF-based Price Target. Stripping out financial assets, NTPC trades at FY08E 23.5x P/E and 16.0x EV/EBITDA, in line with regional growth IPPs, especially in China. The sum of Parts valuation is as follows,

  • Core business – Rs 170;
  • Financial investments + cash on hand – Rs38
  • Coal mines – Rs21

Revised estimates and DCF model assume smooth execution of NTPC’s plans to grow installed capacity to 75GW from 26GW by March 2017. NTPC’s strategy/structure are different from those of private IPPs; further re-rating unlikely: IPO announcements/private equity deals have energized Indian utilities’ stock performance.

NTPC is Asia’s third-largest utility company. JPM suggests that to maximize shareholder value, and unlock US$15B value for equity shareholders in an ideal scenario: NTPC can take the following measures (1) explore SPV structure for new projects; (2) optimally leverage future projects; (3) more merchant power projects, given current market environment; (4) better use of B/S potential for organic/inorganic growth; (5) explore carbon credits for supercritical coal, gas and hydro projects.

HDFC Bank: HDBK
HDBK’s net profit growth trajectory has decisively broken out of the 30-32% band seen over the past 20 quarters. Profits grew by 40% in 2Q08, about 8% higher than expected, driven by higher deposit growth and lower provisioning.

Despite the stock appreciating by 21% and marginally outperforming the Sensex over the past month, JPM set the target price to Rs1,610 for Sep-08, implying 13% upside. 150 branch approvals expected shortly is the likely stock catalyst. The shift out of the 30-32% net profit growth band is likely to be driven by: a) higher balance sheet growth trajectory at 35% CAGR over the next three years; and b) wholesale loans dominating growth over this period, leading to an incremental easing of provisioning requirements.

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