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NTPC Ltd
Enhancing investment decisions
Detailed report
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Explanation of CRISIL Fundamental and Valuation (CFV) matrix
The CFV Matrix (CRISIL Fundamental and Valuation Matrix) addresses the two important analysis of an investment making process
Analysis of Fundamentals (addressed through Fundamental Grade) and Analysis of Returns (Valuation Grade) The fundamental
grade is assigned on a five-point scale from grade 5 (indicating Excellent fundamentals) to grade 1 (Poor fundamentals) The
valuation grade is assigned on a five-point scale from grade 5 (indicating strong upside from the current market price (CMP)) to
grade 1 (strong downside from the CMP).
CRISIL
Fundamental Grade
Assessment CRISIL
Valuation Grade
Assessment
5/5 Excellent fundamentals 5/5 Strong upside (>25% from CMP)
4/5 Superior fundamentals 4/5 Upside (10-25% from CMP)
3/5 Good fundamentals 3/5 Align (+-10% from CMP)
2/5 Moderate fundamentals 2/5 Downside (negative 10-25% from CMP)
1/5 Poor fundamentals 1/5 Strong downside (
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March 21 , 2011Fair Value Rs 232CMP Rs 173
Fundamental Grade 4/ 5 (Strong fundamentals)
Valuation Grade 5/ 5 (CMP has strong upside)
Industry Information technology
Polaris Software Limited Business momentum remains intact
Fundamental Grade 5/ 5 (Excellent fundamentals)
Valuation Grade 5/ 5 (CMP has strong upside)
Industry Independent power producers & utilities
NTPC LtdStanding tall
NTPC is the largest power producer in India with 28.6% share in generation.
The company has a stable business model earning fixed return on equity along
with efficiency incentives based on normative parameters. We maintain our
fundamental grade of 5/5, indicating that its fundamentals are excellent
relative to other listed securities in India.
Largest power producer in India w ith strong growth prospectsNTPC is the largest power producer in India with an installed capacity of
33,194 MW including joint ventures (JVs). NTPC has lined up significant
capacity additions in the 11th and 12th five-year plans to drive future growth.
CRISIL Equities expects NTPC and its JVs to commission 11.8 GW* by FY13.
The continued power deficit scenario in the country will help NTPC maintain
good PLF (plant load factor) on the newly added capacity.
High fuel securityWe believe NTPCs projects have relatively better fuel security due to FSAs
(fuel supply agreements) for 90% of the normative requirement for plants
commissioned before March 2009 and 70% for those commissioned after.
Further, the companys captive mines are at advance stages of development.
Pakhri Barwadih, Jharkhand is expected to commence production by end-FY12.
We expect captive mines to meet 6-7% of total coal requirement by FY16.
Stable cost-plus model: new agreements w ould ensure it continuesNTPCs power plants earn a regulated RoE of 15.5% along with efficiency
incentives for operations above normative parameters. This regulated model
provides stable earnings visibility. NTPC has signed power purchase
agreements (PPAs) for over 1 lakh MW (including existing capacity of ~33GW)
before the expiry of the January 2011 deadline, after which competitive
bidding-based tariff regime became applicable. These PPAs would ensure thecurrent cost-plus model continues during and beyond the 12th Five-Year Plan.
Expect three-year revenue CAGR of 15.0%We introduce FY13 estimates and expect revenues to grow at 15.0% CAGR to
Rs 736 bn in FY13. The end-of-plan bunching of capacity additions would drive
the revenue growth. Adjusted EPS is expected to grow slower at 10.6% CAGR
over FY10-13 due to reducing other income.
Valuations market price has strong upsideCRISIL Equities has used the discounted cash flow method to value NTPC. We
have rolled over our earnings to FY13 and arrived at a fair value of Rs 232 per
share. This fair value implies P/E multiples of 18.9x FY12E and 17.0x FY13E
earnings. We initiate coverage on NTPC with a valuation grade of 5/5,
indicating that the market price has strong upside from the current levels.
KEY FORECAST
(Rs mn) FY09 FY10 FY11E FY12E FY13E
Operating income 442,068 484,671 525,932 626,934 736,445
EBITDA 101,267 126,501 136,698 173,307 208,367
Adj Net income 67,904 82,908 86,861 101,152 112,330
Adj EPS-Rs 8.2 10.1 10.5 12.3 13.6
EPS growth (%) (16.3) 22.1 4.8 16.5 11.1
PE (x) 21.8 20.6 16.4 14.1 12.7
P/BV (x) 2.6 2.7 2.1 1.9 1.8
RoCE (%) 8.5 9.6 9.3 10.6 11.2
RoE (%)12.3 13.8 13.3 14.3 14.6
EV/EBITDA (x) 16.8 15.6 13.1 10.8 9.5
S o u r c e : C o m p a n y , CR I S I L E q u i t i e s e s t i m a t e
CMP: Current Market Price * 1 GW = 1000 MW
CFV MATRIX
KEY STOCK STATI STICSNIFTY/SENSEX 5365/17839
NSE/BSE ticker NTPC
Face value (Rs per share) 10
Shares outstanding (mn) 8,246
Market cap (Rs bn)/(US$ bn) 1,426/33
Enterprise value (Rs bn)/(US$ bn) 1,784/43
52-week range (Rs) (H/L) 222/168
Beta 0.84
Free float (%) 15.5%
Avg daily volumes (30-days) 1,648,005Avg daily value (30-days) (Rs mn) 290
SHAREHOLDING PATTERN
PERFORMANCE VIS--VIS MARKET
Returns
1-m 3-m 6-m 12-mNTPC -3.4% -9.9% -16.9% -14.1%
NIFTY -1.7% -10.6% -10.7% 2.3%
ANALYTICAL CONTACTChetan Majithia (Head) [email protected]
Onkar Kulkarni [email protected]
Vishal Rampuria [email protected]
Client servicing desk
+91 22 3342 3561 [email protected]
1 2 3 4 5
1
2
3
4
5
Valuation Grade
FundamentalGrade
Poor
Fundamentals
Excellent
Fundamentals
Strong
Dow
nside
Strong
Up
side
84.5% 84.5% 84.5% 84.5%
3.4% 2.9% 2.6% 2.6%
8.4% 8.8% 9.1% 9.1%
3.7% 3.8% 3.9% 3.9%
60.0%
70.0%
80.0%
90.0%
100.0%
Dec-10 Sep-10 Jun-10 Mar-10
Promoter FII DII Others
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NTPC Ltd
Table: 1 NTPC: Business environment
Product / segment Pow er generation
Revenue contribution ( FY10) 98.4% (remaining from consultancy services)
Revenue contribution ( FY13) 98.4% (remaining from consultancy services)
Product / service offering Generation and bulk power sale to SEBs
Geographic presence Generation facilities are located across IndiaMarket position Largest power producer in India accounting for 18% of Indias installed capacity
and 28.6% of generation
Industry growth e xpectations Demand for power expected to grow at 7.8% CAGR over FY10-15
Sales grow th(FY07-FY10 3-yr CAGR)
12.6%
Sales forecast(FY10-FY13 3-yr CAGR)
15.0%
Demand drivers Robust GDP growth of 8-8.5% for next five years combined with improvedavailability of power is expected to drive demand for power at 7.8% CAGR
Latent demand of power to be unleashed due to improved availability,penetration of power infrastructure, electrification of villages, etc.
Though power deficit is expected to moderate to 4.8% by FY15, India wouldcontinue to be power starved
Key competitors & competitive landscape With the advent of competitive bidding-based sourcing of power by SEBs fromJanuary 2011 onwards, NTPC would be competing against all the central and
state utilities along with private developers for new projects
Due to signing of PPAs with SEBs before the deadline, NTPC has secured astrong project pipeline that will last it beyond the 12th Plan, thereby
postponing direct competition from other players
Key risks Reduction in regulatory returns post revision in FY14 While NTPC is insulated from fuel price risk, availability of fuel would impact
the PAFs (plant availability factor) and related incentives
Delays in executionS o u r c e : Co m p a n y , C R I S I L E q u i t i e s
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NTPC Ltd
Grading RationaleStrong growth prospects
NTPC is Indias largest power producer with an installed capacity of 33,194 MW
(of which 3,364 MW is through JVs and subsidiaries) as of December 2010. In
addition it has recently synchronised 500 MW unit at Farakka (March 7, 2011) and
660 MW supercritical unit at Sipat (February 18, 2011). The company operates in
a regulated environment wherein it earns a fixed RoE for the projects and all the
costs are passed through in tariffs. In such a business model, growth is primarily
driven by capacity additions.
CRISIL Equities estimates that NTPC would add around 11.8 GW of capacity over
FY10-13 including 3.8 GW through its subsidiaries and JVs. As a result, we expect
commercial generation (including NTPCs proportionate share in JVs) to grow at
9.7% CAGR over FY10-13 as against 5.9% over FY07-10.
Table 2: Capacity addi tionsFY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E FY14E FY15E FY16E FY17E
Coal based 500 2,415 1,000 500 990 1,650 2,820 2,750 3,980 1,980 2,780 3,200
Gas based - - - - - - - - - - - -
Hydro based - - - - - - - 730 590 - - -
Standalone 500 2,415 1,000 500 990 1,650 2,820 3,480 4,570 1,920 2,780 3,200JV 740 - 990 250 460 500 2,000 500 - 1,320 1,980 -
Subsidiaries - - - - 110 - - 880 500 - - -
JV & Sub 740 - 990 250 570 500 2,000 1,380 500 1,320 1,980 -Consolidated 1,240 2,415 1,990 750 1,560 2,150 4,820 4,860 5,070 3,300 4,760 3,200
Estimates are based on commercial operation dates
S o u r c e : Co m p a n y , C E A , C R I S I L E q u i t i e s e s t i m a t e s
The company intends to add around 43 GW of capacity over FY10-17 or nearly 6
GW every year. Cumulatively, it has added 8 GW over FY06-FY10.
We believe
a) 16 GW being already under construction
b) Bulk tendering of equipment for nearly 13GW
c) Increase in BTG equipment manufacturing capacity in India
d) Allocation of 50% power to home states on new projects
will help the company increase its annual capacity addition but achieving 43 GW
by FY17 would be a challenge. CRISIL Equities estimates NTPCs capacity
(including JV & subsidiaries) to grow at 9.5% CAGR to reach around ~60 GW by
FY17 (80% of the target, annual addition of ~4 GW). (See annexure for project
details.)
Pow er de f ici t scenar io in I nd ia to con t inue
CRISIL Research expects power demand to grow at 7.8% CAGR over FY10-15
with industrial sector leading the growth. India is estimated to add around 82 GW
of power capacity over FY10-15 leading to 9.1% CAGR growth in power supply. As
a result, the base power deficit in India is expected to moderate from 10.1% in
FY10 to 4.8% by FY15.
NTPC expected to add 13
GW over FY10-13
including 3.8 GW through
JVs and subsidiaries
Pow er deficit to
moderate but India will
continue to suffer a
shortage
We expect NTPC to add
around 43 GW over
FY10-17
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NTPC Ltd
Figure 1 : Power deficit to moderate
Source: CEA, CRI SIL Resea rch
The declining power deficit is expected to lower merchant tariff rates.
Nevertheless, India is expected to remain power deficit creating opportunities for
power generators such as NTPC. We believe players operating under the cost-plus
model are currently better placed over other players as the most of the latter rely
on merchant power sale to maintain profitability.
CERC tariff norms provide stability of earningsThe Central Electricity Regulatory Commissions new tariff norms (2009-14)
mandate - a) 15.5% return (additional incentive of 0.5% on timely completion);
b) incentive for higher availability and better operating parameters; and c) further
income from Unscheduled Interchange (UI). Though regulated returns cap NTPCs
upside potential, they provide stable cash flows and earnings.
PP As for over 1 lakh MW to maintain fixed RoE model
The national tariff policy has mandated that power procured from public sector
projects after the January 2011 deadline would be through the competitive
bidding process. Few months prior to the deadline, NTPC signed PPAs with various
SEBs for the supply of 1 lakh MW, including that for existing capacity of 33 GW.
Thus, the company has nearly 67 GW of projects which would be executed in
future under the fixed RoE model. Of these, around 16GW of capacity is currently
under construction whereas the rest is still under various stages of development.
While some of these projects could get cancelled due to different execution issues
nevertheless, we believe these projects will help NTPC to maintain its cost-plus
business model till and beyond the 12th Five-Year Plan.
0
2
4
6
8
10
12
0
200
400
600
800
1000
1200
1400
FY05
FY06
FY07
FY08
FY09
FY10
FY11E
FY12E
FY13E
FY14E
FY15E
(MU)
Demand Supply Deficit (RHS)
Signing of 1 lakh MW of
PPAs means NTPC would
not have to face
competitive pressure
over the 12 th Plan period
and further
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Table 3: Details of PPAs signed
Status of projects MWExisting capacity 33,194
Capacity under construction 15,740
Capacity under tendering process 14,311 (of which 13140 MW will be under bulk tendering)
Capacity under development 36,790
PPAs signed 1,00,035
S o u r c e : Co m p a n y , C R I S I L E q u i t i e s
Fuel securi ty: A key differentiator
CRISIL Equities believes that NTPC is relatively better placed in face of the
impending coal shortage in the country. Unlike other players where availability
and price of coal are equally critical factors (governing profitability), NTPC has to
focus only on availability. Since the fixed RoE model ensures pass-through of coal
cost fluctuations, NTPC has to focus on demonstrating high PAF to get efficiency-
linked incentives.
Coal demand: Being a public sector entity and one of the largest clients of Coal
India Ltd (Indias primary coal producer), we believe the supply of coal to NTPC
would be a key priority for Coal India. Coal India would provide 90% of the
normative requirement of coal for NTPCs plants commissioned before 31 March
2009, whereas for its future projects it would supply nearly 70% of the coal
requirement. This provides a relatively higher fuel security than new projects of
other players where in only 50-60% of the plants coal requirement would be
provided by Coal India. This is a key advantage as Coal Indias prices are
significantly lower than imported coal prices.
CRISIL Equities estimates that NTPCs (standalone) coal requirement will grow at
8.4% CAGR from 135 mn tonnes in FY10 to 237 mn tonnes in FY17. Indias
production is expected to lag the expected rise in demand resulting in necessity
for coal imports. The company has been making provisions for 15-20% blending
of imported coal for all the new project equipment that it has ordered.
Figure 2: Coal demand-supply scenario Figure 3 : NTPCs estimated coal requirements#
Source: CRISIL Research
#standalone
Source: CRISIL Equ ities
0
20
40
60
80
100
120
140
160
0
100
200
300
400
500
600
700
800
900
1000
FY05 FY06 FY07 FY08 FY09 FY10
(mn to nne)
Demand Supply Imports (RHS)
135143
162176
194
211222 237
0
50
100
150
200
250
FY10
FY11E
FY12E
FY13E
FY14E
FY15E
FY16E
FY17E
Mn tonne
Existing projects to get
90% of the requirement
whereas new projects
would receive 70% of
the requirement
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NTPC Ltd
Further, the company has been taking steps to secure fuel supplies through the
development of captive coal blocks as well as scouting for coal assets
internationally. Within the allocated coal blocks, three blocks - Pakri-Barwadih,
Chatti-Bariatu and Kerandi - have received environmental clearances and are at
advance stages of development. The Pakhri-Barwadih coal block is expected to
commence production from end of FY12 and would ramp up to full production of
15 MTPA by FY15.
Table 4: Captive coal blocks allocated to NTPC#
Name of coalblock
Estimatedreserves
(Mn tonne)
Annualproduction
(MTPA)
Projects to which coalwill be supplied
Environmentalclearance
Remarks
Pakri-Barwadih,
Jharkhand1,436 15
Eastern and northern
region plantsReceived
MDO appointed, expected to commence
production by end of FY12. Land
acquisition started
Chatti-Bariatu 194 7Barh II and Tanda
Expansion
Received -
Kerandari 285 6Barh II and Tanda
expansionReceived -
Dulanga 245 7 Darlipalli Applied for -
Talaipalli 1,26718
Lara Applier forNTPC-SCCL Global Ventures appointed
as MDO
Total 3,427 53
#In addition to coal block to be developed by CIL NTPC Urja Pvt. Ltd
S o u r c e : Co m p a n y , C R I S I L E q u i t i e s
Gas demand: The situation of gas shortage has considerably improved in FY10
with the gas stations registering best ever PLF of 78.38% in FY10 as compared to67.01% in FY09. While the availability of gas-based stations remained strong at
89.02% during H1FY11 (against 87.09%), PLF was impacted due to low demand
schedule as a result of heavy rains. Currently, NTPC has no gas-based projects
under construction, thus the demand for gas is expected to remain stable.
Demonstrated operational efficiencies
High PLF: NTPC has demonstrated strong efficiencies in operations of its coal-
based plants and has maintained PLF above 90% for the past three consecutive
years. The PLF of the company has been much higher than the all-India average;
and higher fuel security will ensure it remains so in the future.
Competitive tariffs: Since most of its coal-based plants are pit-head / near to
fuel source, the company has been able to maintain a low-cost structure and,
hence, competitive tariffs. Its average tariff for FY10 was Rs 2.27 per kwh.
Turnaround of plants: The company has taken over four power stations with
cumulative capacity of 2025 MW and has successfully turned around their
operations. These stations have reported better PLF after NTPC took over.
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NTPC Ltd
Figure 4: PLF comparison Figure 5 : NTPCs average tariffs
Source: CRISIL Research
#standalone
Source: Company, CRISIL Equit ies
Strong balance sheet to support project financing
We estimate that the company would be comfortable in financing its new projects
through internal accruals and debt without resorting to raising equity. Considering
the stability of returns from its projects and high credit rating of the company, we
do not foresee any constraints for raising debt in future.
Land acquisition and MoEF clearance: key bottlenecks
In the current scenario wherein MoEF clearances have delayed or adversely
impacted many projects, we believe it would be a key monitorable for NTPCs
projects. Further land acquisition is also expected to create bottleneck in timely
execution of its projects. It is critical that none of the existing pipeline of projects
is delayed or cancelled due to two main following reasons.
a) If the project from the current pipeline is cancelled, it loses the benefit of thecost-plus model as all new projects from hereon would be under competitive
bidding.
b) CERC regulations mandate 0.5% additional return (over 15.5%) for executionof projects within the timeline specified by the regulator.
0
10
20
30
40
50
60
70
80
90
100
FY06 FY07 FY08 FY09 FY10 H1FY11
All India NTPC
0
50
100
150
200
250
FY07 FY08 FY09 FY10
(paise/ kwh)
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NTPC Ltd
Key risksProject execution a key monitorable
In the past, NTPC has faced several execution constraints leading to delay of its
projects. While the company has taken measures such as setting up of a project
monitoring cell for live monitoring of execution of various projects, we believe,execution will remain a key monitorable.
Downward revision in fixed RoE and stringent norms
Under the current regulations, which are applicable till FY14, CERC mandates
15.5% RoE (with additional 0.5% for timely execution) along with incentives
based on operating above certain normative parameters. Any downward revision
in fixed RoE or tightening of operating norms for incentive calculation post FY14
could have an adverse impact on the profitability of the company.
Lower coal production can be a dampener
If the mines from which Coal India would be supplying to NTPCs new projects get
delayed, the execution of projects could be affected. The MoEF (Ministry of
Environment and Forest) clearances could be a major bottleneck for new mines of
Coal India and would affect the overall coal production.
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NTPC Ltd
Financial OutlookRevenues to grow at three-year CAGR of 15.0%
NTPCs consolidated revenues are expected to grow at a three-year CAGR of
15.0% to Rs 736 bn in FY13 driven primarily by capacity addition of 11.8 GW over
FY10-13. While capacity is expected to be added at 11.1% CAGR, power
generation is expected to increase at 9.7% CAGR to 315 BU by FY13.
Figure 6: Installed capacity and generation Figure 7: Revenue grow th
Source: Company, CRISI L Equities Source: Company, CRISIL Equities
Adjusted PAT to grow at 10.7% CAGR over FY10-13
CRISIL Equities estimates NTPCs regulated profits to grow at 15.0% CAGR over
FY10-13 as the regulated equity of the company increases due to capacity
additions. However, the declining other income on account of redemption of SEB
bonds and conversion of cash to WIP would lower the overall profit growth to
10.7% CAGR over FY10-13. The conversion of cash into productive assets in
future is expected to boost growth beyond FY13.
Figure 8: Estimated break-up of reported profits
Source: Company, CRISIL Equit ies
RoE, RoCE to improve; leverage to increaseAs the cash on the balance sheet is transferred to productive assets, we expect
NTPCs RoE and RoCE to improve. The blended RoE of the company is expected to
0
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0
5
10
15
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30
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50
FY06
FY07
FY08
FY09
FY10
FY11E
FY12E
FY13E
BUGW
Installed Capacity Generation (RHS)
0%
5%
10%
15%
20%
25%
30%
0
100
200
300
400
500
600
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800
FY06
FY07
FY08
FY09
FY10
FY11E
FY12E
FY13E
Rs bn
Income Growth (RHS)
42% 42% 45%50%
33% 35%36%
35%
26% 23%18% 15%
0%
20%
40%
60%
80%
100%
FY10 E FY11E FY12E FY13E
Regulated PAT Ef ficiency gains + UI Post tax - Other income
Revenues likely to grow at
a three-year CAGR of
15.0% to Rs 736 bn in
FY13 driven by capacity
additions
Declining other income tolower PAT growth;
conversion of cash to
productive assets positive
over long term
Deployment of cash to
increase blended RoE
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NTPC Ltd
increase from 13.8% in FY10 to 14.6% by FY13. Further, as the rate of capacity
addition increases, the net debt to equity is expected to increase from 0.4x to
0.7x by FY13, but will remain comfortable.
Figure 9: RoCE and RoE to improve Figure 10: Net debt-equity and interest cover
Source: Company, CRISI L Equities Source: Company, CRISIL Equities
6.0
7.0
8.0
9.0
10.0
11.0
12.0
13.0
14.0
15.0
16.0
FY09 FY10 FY11E FY12E FY13E
RoE RoCE
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
FY09 FY10 FY11E FY12E FY13E
net D/E Interest cover (RHS)
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NTPC Ltd
Management OverviewCRISIL's fundamental grading methodology includes a broad assessment of
management quality, apart from other key factors such as industry and business
prospects, and financial performance.
Experienced and capable managementBy virtue of its long experience in the power sector and the largest installed power
capacity in the country, NTPC presents a highly experienced management and
strong technical and project management expertise. The management has been
able to consistently raise the level of performance and professionalism, resulting
in improved project execution, higher efficiencies and greater success in dealing
with issues such as delayed payments from state electricity utilities. The fact that
many of the top officials have been associated with the company for a long period
of time, in the context of a high performance public sector unit, assures continuity
and institutionalised knowledge.
Maharatna status provides greater autonomy While operating in a public sector framework introduces unavoidable constraints in
strategic decision making and larger investments, the Maharatna status provides
NTPC relatively greater autonomy in functioning in both domestic and global
markets. As a result of being granted the Maharatna status, the cap on equity
investment in JV/SPV has been raised from US$0.22 bn to US$1.1 bn, thus
enabling the management to take decisions of investing in larger power projects.
Further, it has delegated power to management for securing fuel supply through
acquisition or equity investment in coal mines.
Change of chairman and managing directorDuring the year, Mr Arup Roy Choudhury took over as CMD of NTPC. He is a civil
engineer from Birla Institute of Technology and has done his post graduation in
management from IIT Delhi. He was earlier CMD of National Buildings
Construction Corporation (NBCC) and also associated with various public and
private sector enterprises. He has the distinction of becoming the youngest chief
executive when he joined as CMD of NBCC; he is responsible for turning NBCC
around.
The cap on equity
investment in JV/ SPV
raised from US$0.22
bn to US$1.1 bn
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Corporate Governance
CRISILs fundamental grading methodology includes a broad assessment of
corporate governance and management quality, apart from other key factors such
as industry and business prospects, and financial performance. In this context,
CRISIL Equities analyses the shareholding structure, board composition, typical
board processes, disclosure standards and related-party transactions. Any
qualifications by regulators or auditors also serve as useful inputs while assessing
a companys corporate governance.
The corporate governance at NTPC meets the statutory levels supported by good
board practices and an independent board. NTPC enters into memorandum of
understanding (MOU) with Government of India (GoI) setting yearly targets in
financial and operational areas. The assessment of performance vis-a-vis the
targets by Ministry of Power and Department of Public Enterprises ensures
transparency and accountability.
Board composition
NTPCs board consists of 19 members, of whom seven are executive directors and
two are GoI nominee directors. The fairly large board, not uncommon among
PSUs, includes non executive directors whose profile brings to the table sector
experience relevant to NTPC as well as diversified technical, business and
administrative experience.
Board processes
The board processes appear to be well structured, with committees - audit,
remuneration and project sub-committees - in place, supporting a good corporate
governance and decision-making framework.
Dominant government control structurally limitsminority shareholder right
By virtue of 84.5% stake, the GoI, as the majority shareholder, enjoys rights
which always place the minority shareholders at a potential disadvantage with
regard to having a say in broader corporate affairs. This is an inherent structural
limitation as compared to the rights enjoyed by non-owner shareholders in a more
widely-held corporation. While NTPCs public sector character introduces
procedures, audits, etc. which are theoretically designed to assist good corporate
governance and greater accountability, in practice it still exposes the company to
the relatively greater risk of influence from the majority owner.
Commendable disclosure standards and transparency
The quality of disclosure and transparency in reporting can be considered as good,
judged by the level of information and detail furnished in annual reports, website
and other publicly available information. Further, it appears committed to a high
level of corporate social responsibility, as reflected in the various initiatives it has
adopted in this regard.
Corporate governance
practices are good
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CRISIL Limited. All Rights Reserved. CRISIL EQUITIES | 13
NTPC Ltd
Valuation Grade: 5/ 5We have used the discounted cash flow (DCF) method to value NTPC. We have
rolled over our earnings estimates to FY13 and arrived at a fair value of Rs 232
per share. This fair value implies P/E multiples of 18.9x FY12E and 17.0x FY13E
earnings and P/BV multiples of 2.6x FY12E and 2.4x of FY13E book values.
Key DCF assumptions
We have considered the discounted value of the firms estimated free cash flow
from FY13 to FY20.
Our assumptions factor in 10% CAGR growth in capacity additions over FY10-15
and 6.7% CAGR over FY15-20. We have assumed a terminal growth rate of 5%
beyond FY20. Considering the power deficit scenario in India and strong cash
generation by NTPC, which would be deployed in power assets, we believe these
capacity additions are possible.
WACC computation
FY13-20 Terminal value
Cost of equity 13.0% 13.0%
Cost of debt (post tax) 7.0% 5.9%
WACC 10.5% 9.4%Terminal growth rate 5.0%
Sensitivity analysis to terminal WACC and terminal grow th rate
Terminal growth rate
TerminalWACC 3.0% 4.0% 5.0% 6.0% 7.0%
7.4% 265 350 504 870 2,870
8.4% 198 248 327 471 814
9.4% 152 185 232 306 441
10.4% 120 142 173 217 286
11.4% 96 112 133 161 203
S o u r c e : C R I S I L E q u i t i e s e s t i m a t e s
One-year forward P/ E band One-year forward EV/ EBITDA band
Source: NSE, Company, CRISI L Equities Source: NSE, Company, CRISI L Equities
0
50
100
150
200
250
300
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
(Rs)
NTPC 14x 16x 18x 20x
0
500000
1000000
1500000
2000000
2500000
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
(Rs mn)
NTPC 10x 12x 14x 16x
We have rolled over our
earnings estimate and
fair value to FY13 and
arrived at a fair value ofRs 232 per share
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CRISIL Limited. All Rights Reserved. CRISIL EQUITIES | 14
NTPC Ltd
P/ E premium / discount to NIFTY P/ E movement
Source: NSE, Company, CRISI L Equities Source: NSE, Company, CRISI L Equities
Peer comparison*Companies M.cap Price/ Earnings (x) Price/ Book (x) EV/EBITDA RoE (% )
(Rs bn) FY11E FY12E FY13E FY11E FY12E FY13E FY11E FY12E FY13E FY11E FY12E FY13E
NTPC Ltd 1,426 16.4 14.1 12.7 2.1 1.9 1.8 13.1 10.8 9.5 13.3 14.3 14.6
NTPC Ltd (consensus) 1,426 15.8 14.2 12.7 2.1 1.9 1.8 11.5 9.7 8.3 13.4 13.8 14.4
CESC Ltd 37 10.8 9.3 7.0 0.8 0.8 0.8 7.8 7.3 4.6 9.6 9.6 12.4
JSW Energy Ltd 118 11.6 7.4 8.2 2.0 1.6 1.4 9.4 5.2 5.4 18.8 23.6 17.9
Torrent Power Ltd 113 12.1 10.0 9.6 2.3 1.9 1.6 6.6 5.8 6.1 21.7 22.1 18.5
Adani Power Ltd 241 35.2 9.5 7.0 3.7 2.7 2.0 27.6 6.9 4.4 10.7 32.0 32.1
NHPC Ltd 280 15.8 14.1 11.4 1.1 1.0 0.9 10.7 9.3 7.8 6.8 7.3 8.7
Neyveli Lignite Ltd 165 12.7 11.9 10.2 1.5 1.4 1.2 9.9 7.4 5.6 12.4 12.2 12.0
Tata Power Ltd 293 15.6 12.8 11.5 2.2 1.9 1.7 10.4 7.8 6.6 14.7 16.2 15.7
*as on March 21, 2011
S o u r c e : C R I S I L E q u i t i e s , I n d u s t r y e s t i m a t e s
5
5.5
6
6.5
7
7.5
8
8.5
9
9.5
10
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Premium/Discount to NIFTY Median 10 yr G-Sec yeild
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
1yr Fwd PE (x) Median PE
+1 std dev
-1 std dev
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CRISIL Limited. All Rights Reserved. CRISIL EQUITIES | 15
NTPC Ltd
Company OverviewNTPC is Indias largest power utility established in 1975. The company is
primarily a thermal power producer with an installed capacity of 33,194 MW
(including JVs and subsidiaries) as of December 2010. Historically, coal-based
capacity has been the mainstay of power generation (contributing nearly 82% of
installed capacity). Further, NTPC has also ventured into various other
businesses in the power sector value chain such as power trading, equipment
manufacturing, coal mining and project consultancy.
Figure 11: Capacity break-up ownership Figure 12: Capacity break-up fuel type
Source: Company, CRISI L Equities Source: Company, CRISI L Equities
Regulations: NTPC is governed by the CERC regulations which mandate a
15.5% RoE for power projects (additional 0.5% is provided if the project iscompleted on time). All the costs such as fuel, interest and depreciation can be
passed through in the tariffs (after CERC approval), thus insulating the
profitability of the company from any cost variation. The regulation also provides
for efficiency incentives if the power plant operates at parameters over those
specified as normative in the regulations.
Key milestones
1975 The company was incorporated
1985 Complete decade of existence and achieved 2,200 MW of capacity
1987 500 MW of Korba unit synchronised; installed crosses 5,000 MW
1997 Identified by GoI as Navratna PSU; 100 BU generation in a year
1998 Commissioned first naphtha unit of 350 MW at Kayamkulam
2002 Three wholly owned subsidiaries - NTPC Electric Supply Company Ltd,NTPC Hydro Ltd and NTPC Vidyut Vyapar Nigam Ltd - incorporated
2004 Listed on stock exchanges
2006 Badarpur Station with 705 MW transferred to NTPC
Another 740 MW added through JV Ratnagiri Gas Power Project Ltd
2009 30,000 MW capacity achieved, signs long-term FSA with Coal India for 20years
2010 Agreement with NPCIL to form company to set up nuclear power project.Government divests 5% stake through FPO
NTPC, 90%
JV's, 10%
Subsidiaries,
0%
Coal-based, 82%
Gas-
based, 18%
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CRISIL Limited. All Rights Reserved. CRISIL EQUITIES | 16
NTPC Ltd
Figure 13: Corporate structure and business overview
S o u r c e : C o m p a n y
NTPC Ltd
Pow er Generation
25875 MW Coal Based (standalone)
3955 MW Gas Based (standalone)
PowerGeneration
NTPC Hydro Ltd
(100%)
Kanti Bijlee
Utpadan Nigam
Ltd (64.57%)
Bhartiya Rail
Bijlee Company
Ltd (74%)
Aravali Power
Company Ltd
(50%)
NTPC Tamil Nadu
Energy Company
(50%)
Nabinagar Power
Generating
Company (50%)
NTPC SAIL Power
Company Pvt. Ltd
(50%)
Ratnagiri Gas
Power Pvt. Ltd
(30.17%)
Meja Urja Nigam
Pvt. Ltd (50%)
Anushakti VidhyutNigam Ltd (49%)
Services
NTPC Electric
Supply Company
L td
(100%)
Utility Powertech
Ltd
(50%)
NTPC Alstom
Power Services
Pvt. Ltd
(50%)
National High
Power Test
Laborat ory Pvt.Ltd
(25%)
Energy Efficiency
Service Ltd
(25%)
Equipmentmanufacturing
NTPC BHEL
Power Projects
Pvt. Ltd
(50%)
BF NTPC Energy
Systems Ltd.
(49%)
Transformers and
Electricals Kerala
Ltd
(44.6%)
CoalMining
International Coal
Ventures Pvt. Ltd
(14.28%)
NTPC SCCL
Global Ventures
Pvt. Ltd
(50%)
CIL NTPC Urja
Pvt. Ltd
(50%)
PowerTrading
NTPC Vidyut
Vyapar Nigam
(100%)
National Power
Exchange Ltd
(16.67%)
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CRISIL Limited. All Rights Reserved.
NTPC Ltd
Table 5: Project details*
Project cost
(Rs mn)
Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Fuel
LinkageEPC Contrac
Sipat - I 83,234 660 1320 0 0 0 0 0 Yes Yes
Barh - I 86,930 0 0 0 1320 660 0 0 Yes Yes
Korba - III 24,485 500 0 0 0 0 0 0 Yes Yes
Dadri 25,677 490 0 0 0 0 0 0 Yes Yes Farakka - III 25,704 0 500 0 0 0 0 0 Yes Yes
Simhadri - II 50,385 0 1000 0 0 0 0 0 Yes Yes
Bongaingaon - I 43,754 0 0 750 0 0 0 0 Yes Yes
Mauda - I 54,593 0 0 1000 0 0 0 0 Yes Yes
Barh - II 73,410 0 0 0 660 660 0 0 Yes Yes
Rihand - III 62,308 0 0 500 500 0 0 0 Yes Yes
Vindhyachal - IV 59,150 0 0 500 500 0 0 0 Yes Yes
Solapur 66,000 0 0 0 0 660 660 0 Yes Under bulk tende
Mauda - II 66,000 0 0 0 0 0 1320 0 Yes Under bulk tende
Singrauli - III 25,000 0 0 0 500 0 0 0 No No
Vindhyachal - V 25,000 0 0 0 500 0 0 0 No No
Lara 80,000 0 0 0 0 0 800 800 Yes Under bulk tende
Darlipali 80,000 0 0 0 0 0 0 1600 Yes Under bulk tende
Gajmara 80,000 0 0 0 0 0 0 800 Yes Under bulk tende
Coal based 1650 2820 2750 3980 1980 2780 3200
Koldam 45,272 0 0 600 200 0 0 0 NA Yes
Tapovan Vishnugad 35,742 0 0 130 390 0 0 0 NA Yes
Hydro 0 0 730 590 0 0 0
Jhajhhar HPGCL 78,924 500 1000 0 0 0 0 0 No Yes
Vallur - TNEB 86,396 0 1000 500 0 0 0 0 Yes Yes
Meja JV UP - 50% 66,000 0 0 0 0 660 660 0 Yes Under bulk tende
Nabinagar 99,000 0 0 0 0 660 1320 0 Yes Under bulk tende
JVs 500 2000 500 0 1320 1980 0
Nabhinagar 53,520 0 0 500 500 0 0 0 No Yes
MTPS - BSEB 17,550 0 0 380 0 0 0 0 No Yes Subsidiaries 0 0 880 500 0 0 0
Total 1,494,033 2150 4820 4860 5070 3300 4760 3200
*based on expected CoDs
S o u r c e : C R I S I L E q u i t i e s , CR I S I L R e s e a r c h , i n d u s t r y
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CRISIL Limited. All Rights Reserved. CRISIL EQUITIES | 18
NTPC Ltd
Annexure: Financials
S o u r c e : C R I S I L E q u i t i e s
Income statement Balance Sheet
(Rs mn) FY09 FY10 FY11E FY12E FY13E (Rs mn) FY09 FY10 F Y11E F Y12E FY13E
Operating income 442,068 484,671 525,932 626,934 736,445 Liab il it ies
EBITDA 101,267 126,501 136,698 173,307 208,367 Equity share capital 82,455 82,455 82,455 82,455 82,455
EBITDA margin 22.9% 26.1% 26.0% 27.6% 28.3% Reserves 489,626 542,761 596,356 655,371 720,908
Depreciation 25,146 29,170 30,391 37,743 47,137 Minorities - - - - -
EBIT 76,121 97,331 106,307 135,564 161,230 Ne t worth 572,081 625,216 678,811 737,826 803,363
Interest 14,069 13,404 15,958 25,237 34,779 Convertible debt - - - - -
Operating PBT 62,052 83,927 90,349 110,327 126,451 Other debt 389,738 442,377 534,543 618,461 725,979
Other income 31,953 26,322 24,930 22,118 20,631 Total debt 389,738 442,377 534,543 618,461 725,979
Exceptional inc/(exp) 13,021 5,469 5,000 - - Deferred tax liability (net) 1 2,297 2,297 2,297 -
PBT 107,026 115,718 120,280 132,445 147,082 Total liabil itie s 961,820 1 ,0 69 ,8 90 1 ,2 15 ,6 51 1 ,3 58 ,5 84 1 ,5 29 ,3 42
Tax provision 26,101 27,341 28,419 31,293 34,751 Assets
Minority interest - - - - - Net fixed assets 349,268 387,666 448,335 597,278 810,814
PAT (Repor ted) 80,925 88,377 91,861 1 01 ,1 52 1 12 ,3 30 Capital WIP 309,292 376,815 461,977 453,710 409,475
Less: Exceptionals 13,021 5,469 5,000 - - Total fixed assets 658,560 764,481 910,312 1 ,0 50 ,9 88 1 ,2 20 ,2 8 9
Adjusted PAT 67,904 82,908 86,861 101,152 112,330 Inves tments 115,095 98,341 81,702 65,187 48,672
Current assets
Ratios Inventory 34,108 35,835 40,852 48,698 57,204
FY09 FY10 FY11E FY12E FY13E Sundry debtors 38,189 70,808 79,718 98,462 119,697
Growth Loans and advances 80,513 65,674 78,766 93,893 110,294
Operating income (%) 14.0 9.6 8.5 19.2 17.5 Cash & bank balance 172,505 160,530 156,959 156,030 158,612
EBITDA (%) (9.3) 24.9 8.1 26.8 20.2 Marketable securities 1,865 19,435 19,435 19,435 19,435
Adj PAT (%) (16.3) 22.1 4.8 16.5 11.1 Total cur rent asse ts 327,180 352,282 375,731 416,518 465,242
Adj EPS (%) (16.3) 22.1 4.8 16.5 11.1 Total cur rent liabili ties 139,409 145,601 152,481 174,496 205,248Ne t current assets 187,771 206,681 223,250 242,022 259,994
Pro fitab il ity Intangibles/ Misc . expenditure 394 387 387 387 387
EBITDA margin (%) 22.9 26.1 26.0 27.6 28.3 Total assets 961,820 1 ,0 69 ,8 90 1 ,2 15 ,6 51 1 ,3 58 ,5 84 1 ,5 29 ,3 42
Adj PAT Margin (%) 15.4 17.1 16.5 16.1 15.3
RoE (%) 12.3 13.8 13.3 14.3 14.6 Cash flow
RoCE (%) 8.5 9.6 9.3 10.6 11.2 (Rs Mn) FY09 FY10 F Y11E F Y12E FY13E
RoIC (%) 18.6 16.5 14.3 14.1 13.7 Pre-tax profit 94,005 110,249 115,280 132,445 147,082
Total tax paid (26,102) (25,045) (28,419) (31,293) (37,048)
Valuations Depreciation 25,146 29,170 30,391 37,743 47,137
Price-earnings (x) 21.8 20.6 16.4 14.1 12.7 Working capital changes (3,504) (13,315) (20,139) (19,701) (15,391)
Price-book (x) 2.6 2.7 2.1 1.9 1.8 Ne t cash from ope rations 89,545 101,059 97,112 119,193 141,780
EV/EBITDA (x) 16.8 15.6 13.1 10.8 9.5 Cash from investments ;
EV/Sales (x) 3.9 4.1 3.4 3.0 2.7 Capital expenditure (146,194) (135,084) (176,222) (178,419) (216,439)
Dividend payout ratio (%) 43.0 41.7 41.7 41.7 41.7 Investments and others 17,510 (816) 16,639 16,515 16,515
Dividend yield (%) 2.3 2.2 2.7 3.0 3.3 Ne t ca sh fr om inv es tm en ts (1 28,684) (135,900) (159,583) (161,904) (199,924)
Cash from financing
B/S ratios Equity raised/(repaid) (614) - - - -
Inventory days 37 37 39 40 40 Debt raised/(repaid) 83,733 52,639 92,166 83,918 107,519
Creditors days 109 112 106 104 105 Dividend (incl. tax) (34,784) (36,815) (38,266) (42,137) (46,793)
Debtor days 32 54 56 58 60 Others (incl extraordinaries) 9,704 7,042 5,000 - -
Working capital days 10 15 26 33 37 Net cash from financing 58,039 22,866 58,900 41,781 60,725
Gross asset turnover (x) 0.7 0.7 0.7 0.7 0.7 Change in cash position 18,900 (11,975) (3,571) (929) 2,582
Net asset turnover (x) 1.4 1.3 1.3 1.2 1.0 Closing cash 172,505 160,530 156,959 156,030 158,612
Sales/operating assets (x) 0.7 0.7 0.6 0.6 0.6
Current ratio (x) 2.3 2.4 2.5 2.4 2.3 Quarterly financials - standalone
Debt-equity (x) 0.7 0.7 0.8 0.8 0.9 (Rs Mn) Q3FY10 Q4FY10 Q1FY11 Q2F Y11 Q3F Y11
Net debt/equity (x) 0.4 0.4 0.5 0.6 0.7 Ne t Sales 117,092 127,315 133,026 133,505 138,886
Interest coverage 5.4 7.3 6.7 5.4 4.6 Change (q-o-q) 9% 4% 0% 4%
EBITDA 38,907 30,439 33,448 33,713 42,305
Per share Change (q-o-q) -22% 10% 1% 25%
FY09 FY10 FY11E FY12E FY13E EBITDA margin 33.2% 23.9% 25.1% 25.3% 30.5%
Adj EPS (Rs) 8.2 10.1 10.5 12.3 13.6 PAT 23,650 20,177 18,419 21,074 23,714
CEPS 11.3 13.6 14.2 16.8 19.3 Adj PAT 23,650 20,177 18,419 16,067 23,016
Book value 69.4 75.8 82.3 89.5 97.4 Change (q-o-q) -15% -9% -13% 43%
Dividend (Rs) 4.2 4.5 4.6 5.1 5.7 Adj PAT marg in 20.2% 15.8% 13.8% 12.0% 16.6%
Actual o/s shares (mn) 8,245.5 8,245.5 8,245.5 8,245.5 8,245.5 Adj EPS 2.9 2.4 2.2 1.9 2.8
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CRISIL Limited. All Rights Reserved. CRISIL EQUITIES | 19
NTPC Ltd
Focus Charts
Capacity trend and generation Revenue and reported PAT trends
Source: Company, CRISI L Equities Source: Company, CRISI L Equities
RoE and RoCE trends Excess return of NTPC over NIFTY vs. interest rates
Source: Company, CRISI L Equities Source: Company, CRISI L Equities
Estimated break-up of reported profits Shareholding pattern over the quarters
Source: Company, CRISI L Equities Source: Company, CRISI L Equities
0
50
100
150
200
250
300
350
0
5
10
15
20
25
30
35
40
45
50
FY06
FY07
FY08
FY09
FY10
FY11E
FY12E
FY13E
BUGW
Installed Capacity Generation (RHS)
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
0
100
200
300
400
500
600
700
800
FY09 FY10 FY11E FY12E FY13E
Rs bn
Revenues PAT
Revenues growth (RHS) PAT Growth (RHS)
6.0
7.0
8.0
9.0
10.0
11.0
12.0
13.0
14.0
15.0
16.0
FY09 FY10 FY11E FY12E FY13E
RoE RoCE
-1
-0.5
0
0.5
1
1.5
5
5.5
6
6.5
7
7.5
8
8.5
9
9.5
10
Nov-0
4
Mar-0
5
Jul-0
5
Nov-0
5
Mar-0
6
Jul-0
6
Nov-0
6
Mar-0
7
Jul-0
7
Nov-0
7
Mar-0
8
Jul-0
8
Nov-0
8
Mar-0
9
Jul-0
9
Nov-0
9
Mar-1
0
Jul-1
0
Nov-1
0
All listedhistory
10yr G-sec yield Excess return of NTPC over NIFTY
42% 42% 45%50%
33% 35%36%
35%
26% 23%18% 15%
0%
20%
40%
60%
80%
100%
FY10 E FY11E FY12E FY13E
Regulated PAT Efficiency ga ins + UI Post tax - Other income
84.5% 84.5% 84.5% 84.5%
3.4% 2.9% 2.6% 2.6%
8.4% 8.8% 9.1% 9.1%
3.7% 3.8% 3.9% 3.9%
60.0%
70.0%
80.0%
90.0%
100.0%
Dec-10 Sep-10 Jun-10 Mar-10
Promoter FII DII Others
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CRISIL I ndependent Equity Research Team
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