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NTPC: Where to from here?

Mar 10, 2005

In the past couple of months, one power stock that has been much in the limelight is NTPC, India's largest power generation company. Since its listing in November 2004, the stock has outperformed the benchmark BSE-Sensex by around 5%. And this has been made possible by the decent results announced by the company for the third quarter of FY05 and due to some of its announcements with regards to future growth.

As a matter of fact, for 3QFY05, while NTPC posted a YoY revenue growth of 6%, profits were up by over 67% mainly on account of a 100 basis points expansion in operating margins and lower tax outgo. The growth in the topline was made possible by an equivalent growth in the company's generation business. As a matter of fact, NTPC's current generation capacity stands at 22,435 MW, 82% of which is coal based and the remaining gas-based. Moreover, the company has plans to add 9,370 MW and 11,558 MW in the tenth and eleventh plans respectively. This would take the company's share of generation in India's total capacity to over 20% from the 19% levels currently. What makes NTPC a better play in the power generation business is the high level of PLF (plant load factor) that its coal-based plants clock. While the national average lie at 73%, NTPC's plants run at a PLF of around 84%, indicating a better capacity utilisation and thus efficiency on the cost front.

However, while there are positives attached to an investment in the company, investors should also take note of the two key negatives that have the ability to slow the company's growth in the future. The first and the foremost is the fact that that it is the bureaucrat in the South Block and not the company who decides the returns that are to be earned from the business. Recently, the post tax return on the equity of central power generating units was reduced from 16% to 14%. If it were to reduce further, it will have a negative impact on the NTPC's earnings. Besides, populist measures like provision of free power, may affect the financial health of the state electricity boards that are already under a great deal of pressure. This, in turn, could impact NTPC's profitability in the future.

Another risk that NTPC is planning to take care of is the lower availability of fuel for its gas-based power plants. This has led to the PLF of gas-based plants lying low at 68%, which has ultimately impacted the company's overall PLF. In this light, the company's announcement that it is planning to bid for gas blocks on offer for exploration under the fifth round of New Exploration Licensing Policy (NELP-V) seems a move in the right direction. These plans are in line with NTPC's strategy to backward integrate so as to ensure supplies for its future gas based generation capacities. Apart from the current gas-based capacity of 3,955 MW, the company plans to add around 7,000 MW in the eleventh plan and, as such, it is pertinent to secure supplies for the future.

What to expect?
At the current price of Rs 93, the stock is trading at a price to earnings multiple of 16.4 times annualised 9mFY05 earnings. While these valuations might look stretched from the medium term perspective, considering the company's growth plans and the investments that it had lined up for the same, the stock remains one of our top plays from the power sector. We are also positive on the company considering its strategy of backward and forward integration that will, on one hand, ensure it supplies of resources and, on the other, enable it to extend its competencies in the other key areas of the power sector, like consultancy, handling of operations and management (O&M) projects, distribution and power trading.

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