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NTPC: Looking 'power'ful!

Apr 11, 2005

NTPC, the country's largest power generation company, recently held a press conference in order to announce provisional unaudited financial results for FY05. As per the reported numbers given by the company, revenues were up 18% YoY, excluding the impact of the one-time settlement scheme. Profits were up almost 1% YoY. However, if we exclude the impact of the one-time settlement scheme last year, profit growth stood at over 33% YoY. Importantly, realisations of monthly bills from April 2004 to March 2005 were 100%. The company recorded a generation of 159.1 Billion Units (BUs), showing an increase of 6.7% over the previous year's generation of 149.2 BUs. NTPC stations recorded an all time high PLF (plant load factor, or capacity utilisation) of 87.5%, which is the highest for any financial year since its inception. NTPC currently has a share of 20.2% in the total installed capacity of the country. Return On Capital Employed (ROCE) and Return On Net Worth (RONW) during 2004-05 based on provisional and unaudited results were 11.8% and 13.2% respectively as compared to 12.9% and 14.9% during 2003-04 including the effect of One Time Settlement Scheme of earlier years.

NTPC added 2,000 MW (17.5 BUs) of generation capacity during FY05, taking its total capacity to 23,749 MW (208 BUs). The company has plans to become a 45,000 MW plus company by the year 2012. This includes adding green field capacity, expansion of existing stations, joint ventures and takeover of state electricity boards' stations. The government has planned a capacity addition of around 105,000 MW by the end of the eleventh five-year plan (year 2012). NTPC is thus, expected to contribute around 20% to the total incremental power generation capacity planned by 2012. As per the updated corporate plan from 2002-2017, the company has envisaged an installed capacity of over 56,000 MW by 2017 and this includes addition of hydropower capacity and forays into non-conventional and nuclear power generation.

NTPC has set a tenth plan capacity addition target of 9,160 MW, of which 3,500 MW have already been commissioned, 4,210 MW are under construction and the balance 1,450 MW award for Main Plant is expected to be placed shortly. The eleventh plan target for the company is around 17,333 MW, of which 5,260 MW is already under implementation. NTPC spent Rs 53 bn towards capex in FY05, up from the previous figure of Rs 46 bn.

So, what does all this mean?

NTPC is the apex power generating company in the country. In a power-deficit nation like India, investments in power generation are of significant importance in order to improve the power situation. It is necessary for the provision of basic facilities like electricity to the common people and also in order to improve the country's infrastructure, which can act as an enabler to domestic and foreign investment in the country.

These are the factors that necessitate the ambitious expansion plans that the company has on the anvil. With the passage of the Electricity Act, private investment in the sector is expected to get a much-needed boost. This will put the power sector on a much-needed road to recovery. NTPC is a key component of the government's plans to improve the quality of electricity in the country and is expected to gain from the expected growth in the sector.

At the current price of Rs 86, the stock trades at a price to earning multiple of around 13.4 times FY05 earnings. As the country's largest power generating company and the main vehicle for increase in generation capacity over the next few years, we expect NTPC's planned capacity addition to be the main driver in increasing earnings going forward. With a planned capacity addition of 9,160 MW in the tenth five-year plan, out of which 3,500 MW has already been commissioned, the company is expected to add around 6,160 MW to its existing capacity by the year 2007. The results of this will be reflected in FY08 revenues.

There is one very interesting aspect about NTPC that investors should note. The daily fluctuation in its share price is due to the vagaries of the stock market. But a deeper analysis shows that the stock has given impressive returns that can actually be classified as 'risk-free', comparable to the 'risk-free rate' on 10-year government securities! The reason for this is the one-time settlement scheme, through which the company's receivables from the loss-making SEB's were securitised. This situation is expected to continue till 2016, giving the company a virtual guarantee of 100% revenue collection and profit growth! As a result, the risk to the company of non-recovery of dues from the SEBs due to their poor financial health has been completely negated. SEBs are the largest buyers of power from NTPC, accounting for over 99% of revenues. The political gimmick of giving free power to farmers is likely to affect the financial health and derail re-structuring of the SEBs, but given the above-mentioned factors, this is unlikely to have an effect on NTPC.

Therefore, it does appear that the company is poised for 'almost-certain' growth in revenues and profits going forward. For a conservative investor looking for long-term capital appreciation plus dividend with a relatively lower degree of risk, the company appears to be one of the best bets for investment.


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