>NTPC (TATA SECURITIES)

Losing Steam

NTPC, India’s largest power producer is facing huge delays in most of the plants under construction. Delays in capacity addition resulting in lower rate of return on core business, coupled with rich valuations of 3.1xFY10E BV and 25X FY10E EPS makes the stock richly valued. In addition, the free-float adjustment in Nifty is expected to bring down the stock weightage in the index by around 550 bps is a key negative for NTPC. We believe that the above market valuations and slow earnings growth do not justify the current price. We initiate coverage on NTPC with a SELL rating.

Key Highlights

■ Delayed execution: Of the 22,430 MW (inc. JVs) power generation capacity targeted to be added during 11th five year plan ending 2012, only 3,740 MW has been commercialized. Of the 17,430 MW under construction, we expect NTPC to commission only 9,560 MW by FY12. Poor execution resulting in idle CWIP earning zero returns and inefficient utilization of cash generated through operations is expected to suppress NTPC’s ROE.

■ Rich valuations overweigh tariff regulations gains: Though, the new tariff regulations are positive for NTPC, the current valuations more than overweigh the gains from new tariff regulations.

■ Reduced weightage in Nifty: From June 26th 2009, NSE is expected to move to free-float market capitalization basis from the current method of full market capitalization basis for the index constituents. NTPC, with free float of only 10.5%, will be severely impacted with a 550bps fall in weightage in the Nifty.

■ Valuation: We ascribe 1-year forward value of Rs161 per share to NTPC‘s generation business based on DCF approach and Rs16 per share for equity investments and cash & cash equivalents to arrive at our 1-year forward target price of Rs177 per share. At current market prices Rs229, NTPC is trading at 3.1xFY10E BV of Rs74.3 and 25XFY10E EPS of Rs9.1, a steep premium to the market valuations. We initiate coverage with a SELL.

To see full report: NTPC

>BHARTI AIRTEL (TATA SECURITIES)

Bharti & MTN merger - Where is the value?

Bharti has renewed its talk with MTN for a possible partnership with the intent of an eventual meeger of the two companies. The two companies have exclusivity until 31st July 2009 to conclude deal. Upon the conclusion of the deal, Bharti will hold 49% of MTN, while MTN would hold 25% of Bharti and MTN shareholders would hold 11% of Bharti through GDR issue. As per our estimates, Bharti is paying a premium of 44% to MTN's Friday's closing price.

KEY HIGHLIGHTS

• Merger of Equals
• Acquisition to be EPS dilutive in short term
• Synergies, if any, will be back ended
• We see little value
• Valuation

PROPOSED DEAL STRUCTURE
■ Bharti will acquire 36% stake from existing shareholders of MTN (673 mn shares) for a consideration of ZAR86 per share (totalling to USD 6.9bn) and 0.5 Bharti GDRs for every MTN share held (issue of 336mn Bharti GDRs)

■ MTN will issue 467mn additional shares to Bharti such that Bharti would hold 49% of the post-issue shares. Bharti will hold 1140mn shares of MTN; MTN's equity will go up from 1,869mn shares to 2,336mn shares.

■ Bharti will issue 745mn new shares to MTN such that MTN would have 25% of Bharti, post the deal. Bharti equity will be increased to 2,979mn shares. MTN would also pay cash of USD2.9bn to Bharti.


To see full report: BHARTI AIRTEL