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NTPC: High voltage performance! - Views on News from Equitymaster
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NTPC: High voltage performance!
Jan 30, 2006

Performance Summary
NTPC, India’s largest power generating company, has reported robust results for the third quarter ended December 2005. Revenues and net profits have increased by 19% YoY and 31% YoY respectively. The company has, however, witnessed a reduction in its operating margins on the back of higher fuel costs and rebate under the One Time Settlement scheme. While the topline and bottomline performance have been decent for the nine-month period, margins have contracted sharply for the same reasons as mentioned above.

Financial performance: A snapshot…
(Rs m) 3QFY05 3QFY06 Change 9mFY05 9mFY06 Change
Sales 61,072 72,381 18.5% 171,478 190,791 11.3%
Expenditure 41,258 50,490 22.4% 118,587 141,913 19.7%
Operating profit (EBDITA) 19,814 21,891 10.5% 52,891 48,878 -7.6%
Operating profit margin (%) 32.4% 30.2%   30.8% 25.6%  
Other income 5,729 8,026 40.1% 16,396 19,869 21.2%
Interest 2,401 2,829 17.8% 7,878 6,731 -14.6%
Depreciation 4,981 5,063 1.6% 14,632 15,216 4.0%
Profit before tax 18,161 22,025 21.3% 46,777 46,800 0.0%
Tax 4,506 4,208 -6.6% 11,641 4,261 -63.4%
Profit after tax/(loss) 13,655 17,817 30.5% 35,136 42,539 21.1%
Net profit margin (%) 22.4% 24.6%   20.5% 22.3%  
No. of shares 8,246.0 8,246.0   8,246.0 8,246.0  
Diluted earnings per share* (Rs)         7.9  
P/E ratio* (x)         14.2  
* On a trailing 12-months basis            

What is the company’s business?
NTPC is the largest power generating company in India with a nationwide presence and an installed capacity of 23,749 MW, which is around 20% of India's total installed capacity. 13 of the company’s 20 plants are based on coal with the remaining 7 using gas or liquid fuels. The company has one of the best PLF rates in the country with its coal-based plants recording a PLF of around 85% as compared to the national average of 73%.

What has driven performance in 3QFY06?
Powering its way ahead: A 21% YoY growth in power generation revenues has led NTPC’s strong topline growth during 3QFY06. Since the company has not yet divulged key details with respect to its volume generation and sales and plant load factor, we will complete the result analysis after the receipt of the said information and post the conference call with the management, which is scheduled for tomorrow at noon.

Higher fuel costs dent margins: NTPC’s fuel costs have risen to over 58% of sales in 3QFY06, from 56% of 3QFY05 sales. This has dented the company’s operating margins during the quarter. Also, while staff costs have remained stable, a rise in expenses of rebate on One Time Settlement scheme has negatively affected margins.

Lower taxes aid bottomline: Despite the contraction in operating margins, the net margins of NTPC have witnessed a 220 basis points expansion during 3QFY06. This has mainly been due to higher other income and lower tax expenses. The company’s effective tax rate (after taking into account the tax recoverable as pass-through by way of tariffs) declined from 25% in 3QFY05 19% in 3QFY06. The effective tax rate for 9mFY06 has, in fact, declined to 9% (25% during 9mFY05).

What to expect?
At the current price of Rs 113, the stock is trading at 1.8 times our estimated FY08 book value. The board has recommended a dividend of Rs 2 per share (dividend yield of 1.8%). The third quarter saw NTPC being allotted 2 coal mines to be developed in joint venture with Coal India Limited and 4 coal mines to be developed for exclusive use in the company’s proposed power plants. This shall help the company in enhancing fuel security for meeting its expansion targets set for the tenth and eleventh five year plans. NTPC’s management had earlier outlined an aggressive generation capacity addition plan spread over a period of the next seven years, i.e., till 2012. The company plans to increase its capacity to 30,000 MW by the end of FY07 and to 46,000 MW by the end of FY12. Segregating on the basis of five-year plans, while 9,160 MW is likely to be added in the tenth plan (2002-07), the company plans to add another 17,000 MW in the eleventh plan (2007-12).

Earlier during this month, we had recommended a ‘Buy’ on the stock at Rs 116, with a target price of Rs 160 from a 2-year perspective. This target was based on the net asset valuation of the company. As the country’s largest power generating company and the main vehicle for increase in the country’s generation capacity over the next few years, we expect NTPC’s planned capacity addition to be the main driver for earnings growth in the future.

We shall put up a detailed analysis of the result post the conference call with the management that is scheduled for tomorrow at noon.

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