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NTPC: Margins drained by fuel costs - Views on News from Equitymaster

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NTPC: Margins drained by fuel costs

May 18, 2011

NTPC has declared its fourth quarter and financial year 2011 (FY11) results. The company has reported a 19% YoY growth and 4% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net sales grow by 19% YoY and 26% YoY during 4QFY11 and FY11 respectively.
  • Operating margins decline to 22% from 27% in FY10. This is largely on account of higher fuel costs (as percentage of sales).
  • Despite weaker operating margins, higher other income and lower depreciation charges cushioned the net profit margins.
  • The company recorded higher ever capacity addition of 2,490 MW for FY11.
  • Board has recommended an interim dividend of Rs 3 per share (dividend yield of 1.8%).


Standalone financial performance
(Rs m) 4QFY10 4QFY11 Change FY10 FY11 Change
Net sales 123,534 155,189 25.6% 463,225 548,740 18.5%
Expenditure 96,740 117,002 20.9% 338,857 425,636 25.6%
Operating profit (EBDITA) 26,794 38,187 42.5% 124,368 123,104 -1.0%
EBDITA margin (%) 21.7% 24.6%   26.8% 22.4%  
Other income 6,138 6,660 8.5% 29,076 43,738 50.4%
Depreciation 7,322 6,981 -4.7% 26,500 24,856 -6.2%
Interest 4,817 5,299 10.0% 18,089 21,491 18.8%
Profit before tax 20,793 32,567 56.6% 108,855 120,495 10.7%
Tax 617 4,749   21,573 29,470 36.6%
Effective tax rate 3% 15%   20% 24%  
Profit after tax/(loss) 20,176 27,818 37.9% 87,282 91,025 4.3%
Net profit margin (%) 16.3% 17.9%   18.8% 16.6%  
No. of shares (m)         8,245.5  
Diluted earnings per share (Rs)*         11.0  
Price to earnings ratio (x)         15.5  
(*On a trailing 12-month basis)

What has driven performance in 4QFY11?
  • NTPC grew its sales by 19% YoY during FY11. This was largely a result of improvement in electricity tariffs, as the company volume sales did not have much to cheer about. Volumes grew by a meager 0.8% YoY for the full year. This was led by an equivalent weak growth in power generation. The management has attributed planned plant shutdown due to maintenance and some restrictions from the power grid as two key reasons for the slow growth in power generation. During FY11, NTPC added 2,490 MW of capacity of which 1,600 MW was declared commercial. Further 14,748 MW of capacity is under construction. Coal Linkages received for 9 new projects with a total capacity of 10,920 MW.

    NTPC also faced some fuel issues. This was seen in the decline in its capacity utilisation. While the utilisation (measured by PLF or plant load factor) for coal plants dropped from 90.5% in FY10 to 88.3% in FY11, PLF for gas plants declined from 73.6% to 71.7%. 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. Concerns over the execution of the plan however remain undiluted.

  • NTPC's operating margins declined to 22% during the fiscal, largely on account of higher fuel costs (as percentage of sales). These costs amounted to 60% of the net sales, as against 58% in FY10.

  • Despite a decent growth in net sales, NTPC's net profits were almost flat for the fiscal. Weaker operating margins and higher interest costs (up 20% YoY) played a role in pressurizing the company's annual profits. However, higher other income and lower depreciation charges cushioned the net profit margin for the fourth quarter.

What to expect?
At the current price of Rs 171, the stock is trading at a multiple of 1.8 times our estimated FY13 book value per share. Both NTPC's topline and bottomlne performances have been marginally below our estimates. 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. It has planned capex of Rs 264 bn for FY12. We reiterate our positive view on the stock and will revisit our estimates shortly.

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