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NTPC: Coal costs, receivables the key worries - Views on News from Equitymaster

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NTPC: Coal costs, receivables the key worries
Feb 13, 2012

National Thermal Power Corporation (NTPC) declared the results for the third quarter and nine months of financial year 2011-2012 (9mFY12). The company has reported 14% YoY growth both in net sales and in net profits for the half year period. Here is our analysis of the results.

Performance summary
  • Net sales grow by 14% YoY in 9mFY12 despite very marginal growth in NTPC's generation volume for the third quarter of FY12.
  • Operating margins remain flat for the nine month period. However they are significantly lower for 3QFY12 as compared to 3QFY11. This is largely on account of higher fuel costs (as percentage of sales).
  • In addition, fall in other income dampened profit growth. The net profits grow by 5% YoY in 9mFY12. For 3QFY12, the 10% YoY fall in profits was led by higher deprecation cost and interest outgo.
  • The company had capacity of 36,014 MW at the end of December 2011 and is targeting capacity addition of 4,320 MW in FY12.
  • The company declared interim dividend of Rs 3.5 per share..


Standalone financial performance
(Rs m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
Net sales 134,213 153,323 14.2% 393,550 448,813 14.0%
Expenditure 98,314 124,769 26.9% 314,114 359,209 14.4%
Operating profit (EBDITA) 35,899 28,554 -20.5% 79,436 89,604 12.8%
EBDITA margin (%) 26.7% 18.6%   20.2% 20.0%  
Other income 7,440 9,130 22.7% 37,023 29,188 -21.2%
Depreciation 5,986 7,560 26.3% 17,875 20,554 15.0%
Interest 3,247 4,496 38.5% 10,656 11,551 8.4%
Profit before tax 34,106 25,628 -24.9% 87,928 86,687 -1.4%
Tax 10,392 4,324 -58.4% 24,721 20,385 -17.5%
Effective tax rate 30% 17%   28% 24%  
Profit after tax/(loss) 23,714 21,304 -10.2% 63,207 66,302 4.9%
Net profit margin (%) 17.7% 13.9%   16.1% 14.8%  
No. of shares (m)         8,245.5  
Diluted earnings per share (Rs)*         11.4  
Price to earnings ratio (x)         15.9  
(*On a trailing 12-month basis)

What has driven performance in 9mFY12?
  • NTPC grew its sales by only 14% YoY during 9mFY12. This was largely a result of improvement in electricity tariffs, as the growth in volume sales was negligible. The operating margins were primarily hurt by high coal costs. Going forward, however, we expect the margin pressures to gradually ease off.

  • Currently, 90% of the company's fuel requirement is met domestically via its long-term contract with Coal India. NTPC meets the remaining 10-15% through imported coal, which is also expensive. NTPC's annual coal requirement is around 164 m tonnes.

  • The government's decision to roll back a 12.5% rise in coal prices with the switch over to the new gross calorific value (GCV) based pricing system will, however, benefit NTPC the most going forward. The coal price rise was rolled back due to intense protests from the domestic coal consuming industry, led by power sector companies, including NTPC. NTPC spends around Rs 350 bn a year on purchasing 137 mt coal to fire 36,000 MW of installed capacity. The fuel cost accounts for 77% of NTPC's annual expenditure. Also around 56% of the company's annual fuel expenditure is directed at purchasing domestic coal. It is estimated that pricing under the GCV system would have doubled the company's coal cost to Rs 277 bn.

  • NTPC had capacity of 36,014 MW at the end of December 2011 and is targeting capacity addition of 4,320 MW in FY12. While the company has coal linkages for 9 new projects with a total capacity of 10,920 MW and a gas supply agreement for 14.5 MMSCMD of gas, fuel supplies remain a hindrance to growth. The impact of higher fuel prices was seen in the decline in its capacity utilisation. In order to meet some of its future fuel requirements, the company is looking to produce 45 m tonne of coal from its own mines by 2017. The Ministry of Coal will reallocate the five cancelled coal blocks to the company on which it has incurred Rs 5.6 bn as development costs.

  • NTPC's net profits dropped by 10% YoY in 3QFY12 due to higher depreciation charges and interest outgo. However, NTPC had debt to equity of 0.8 times and interest coverage ratio of 2.6 times in 9mFY12 making it reasonably resilient to rise in interest costs.

  • NTPC's debtor days increased to 69 days at the end of 9mFY12 from 33 days in 9mFY11. This is a major cause of concern. The management stated in the conference call that it currently receives only 30 to 40% of payments on the first day as against 60-70% earlier. However, it reaffirmed that there has not been any default from SEBs (state electricity boards) till date. The company also has considerable receivables on its books (not provided for) to the tune of Rs 7.7 bn due from the government as compensation for one of the hydro power projects that have been discontinued due to ecological issues.

What to expect?
At the current price of Rs 181, the stock is trading at a multiple of 1.8 times our estimated FY14 book value per share. The company is targeting become a 1,28,000 MW by 2032 with 28% capacity from non-fossil sources. NTPC's share in country's generation was 27.4% in 2010-11, with 17.75% of the national capacity. While the high debtor days and pressure on margins remain a concern, we believe that the current valuations factor in most of the downside risks. We reiterate our positive view on the stock.

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