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JP Morgan on NTPC + HDFC Bank

Monday, 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,
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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