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NTPC: Slow expansion impacts performance

May 30, 2008

Performance summary
  • Sales grow 14% YoY in FY08, aided by 21% YoY growth in the fourth quarter. Actual sales figure for the fiscal 4% lower than our estimates.
  • Operating margins contract by 0.6% YoY during the fiscal, owing to higher fuel and other costs (both as percentage of sales).

  • Net profits grow by 8% YoY during FY08, impacted by 23% YoY decline in 4QFY08 profits (which in turn have been impacted by a large deferred tax recoverable amount of Rs 6.5 bn that was reported in 4QFY07). Actual profit figure for the fiscal 11% lower than our estimates.

  • Board recommends final dividend of 80 paise per share. Together with the Rs 2.7 per share of interim dividend, total dividend for FY08 stands at Rs 3.5 per share (dividend yield of 2%).

Financial performance snapshot
(Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
Sales 88,505 107,436 21.4% 325,952 370,501 13.7%
Expenditure 65,206 79,214 21.5% 225,385 258,262 14.6%
Operating profit (EBDITA) 23,299 28,222 21.1% 100,567 112,239 11.6%
Operating profit margin (%) 26.3% 26.3%   30.9% 30.3%  
Other income 6,962 7,439 6.9% 27,855 29,676 6.5%
Interest 5,919 8,074 36.4% 18,594 17,981 -3.3%
Depreciation 6,081 6,071 -0.2% 20,754 21,385 3.0%
Profit before tax 18,261 21,516 17.8% 89,074 102,549 15.1%
Tax 914 8,121 788.5% 20,427 28,401 39.0%
Profit after tax/(loss) 17,347 13,395 -22.8% 68,647 74,148 8.0%
Net profit margin (%) 19.6% 12.5%   21.1% 20.0%  
No. of shares       8,246.0 8,246.0  
Diluted (unadjusted) EPS (Rs)       8.3 9.0  
P/E ratio (x)         19.0  

What has driven performance in FY08?
  • The 13.7% YoY growth in NTPC’s FY08 topline was largely driven by growth in volume sales as also improved realisations. While volume sales of electricity grew by 6.5% YoY, from 177 bn units in FY07 to 188 bn units in FY08, electricity tariffs improved by 4.3% YoY mainly due to the fuel price increase and the subsequent passing on of the same to consumers. Higher volume sales were a consequence of 6.8% YoY rise in generation led by higher PLF of its coal stations as also the capacity additions. NTPC added 1,990 Mw of capacity (including 740 MW added through Ratnagiri joint venture) during the past 12 months. At the end of March 2008, NTPC’s generation capacity stood at 29,894 MW (including 2,044 MW through joint ventures). Its coal based plants operated at a PLF (plant load factor, or capacity utilisation) of 92.2% during FY08, up from 89.4% in FY07. However, the PLF of gas based plants declined from 71.9% to 68.5% owing to low supply of gas and lower demand for power generated by using liquid fuels like naphtha (as this power is expensive than that generated using gas).

    Of the 2,490 MW that NTPC had planned to install during FY08, only 1,990 MW was installed (including 990 MW through joint ventures). The capacity addition plans are facing certain challenges but the company is quite confident of adding 22,430 MW of capacity during the eleventh five year plan (FY08 to FY12). It has indicated of having 16,680 MW of capacity under construction and 3,760 MW under tendering. Further, the management has outlined a capex of Rs 135 bn to set up 2,670 MW capacities during FY09.

  • NTPC reported net exceptional items to the tune of Rs 8.4 bn during the fourth quarter, which impacted the overall performance of the company during the fiscal. After adjusting profits for previous year sales, exchange rate variations, prior period items, wage provisions and income tax assessments, net profits grew by 15% YoY during FY08.

  • NTPC’s coal production plan is facing some issues because of delays in land acquisitions and transportation bottlenecks. However the company is hopeful of having a coal production capacity of 2.3 m tonnes by FY10 and 14 m tonnes by FY12.

What to expect?
Overall the performance of NTPC during FY08 was lower than expected mainly due to slippages in capacity additions. The capacity addition plan was 2,490 MW but it added only 1,990 MW, including 740 Mw in Ratnagiri plant, which was not the part of planned capacity earlier. We believe that there will be challenges in capacity addition in future as well, as the underlying factors due to which the capacity addition slipped have not changed much.

At the current price of Rs 170, the stock is trading at a multiple of 2.1 times our estimated FY10 book value. Owing to facts that NTPC’s core return on equity is in the range of 18% to 21%, the company’s huge capacity expansion plans and it being in the process of becoming an integrated utility, these valuations seem justified thus leaving room for upside in the long-term. We maintain our positive view on the stock from a long-term perspective.

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