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NTPC FY06 results: Our view - Views on News from Equitymaster

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NTPC FY06 results: Our view
May 31, 2006

Performance summary
NTPC, India’s largest power generating company, has announced sedate results for the fourth quarter and fiscal ended March 2006. For FY06, while revenues have grown by 16% YoY, net profits have almost been at the FY05 levels. A major reason for the lacklustre growth in the fiscal is the poor performance recorded in 4QFY06, wherein net profits have declined by 32% YoY. Pressure on bottomline during the fourth quarter has been a result of substantially lower other income and is despite a sharp decline in tax expenses (on the back of tax refunds for previous years).

Financial performance: A snapshot…
(Rs m) 4QFY05 4QFY06 Change FY05 FY06 Change
Sales 64,269 72,914 13.5% 225,650 261,429 15.9%
Expenditure 46,365 55,331 19.3% 164,952 197,244 19.6%
Operating profit (EBDITA) 17,904 17,583 -1.8% 60,698 64,185 5.7%
Operating profit margin (%) 27.9% 24.1%   26.9% 24.6%  
Other income 13,414 6,232 -53.5% 29,810 26,101 -12.4%
Interest 2,264 2,854 26.1% 10,142 9,585 -5.5%
Depreciation 4,952 5,261 6.2% 19,584 20,477 4.6%
Profit before tax 24,102 15,700 -34.9% 60,782 60,224 -0.9%
Tax 1,168 37 -96.8% 2,712 2,022 -25.4%
Profit after tax/(loss) 22,934 15,663 -31.7% 58,070 58,202 0.2%
Net profit margin (%) 35.7% 21.5%   25.7% 22.3%  
No. of shares 8,246.0 8,246.0   8,246.0 8,246.0  
Diluted earnings per share (Rs)         7.1  
P/E ratio (x)         15.4  

What is the company’s business?
NTPC is the largest power generating company in India with a nationwide presence and an installed capacity of 24,935 MW, which is around 20% of India's total installed capacity. 13 of the company’s 20 plants are based on coal with the remaining 7 using gas or liquid fuels. The company has one of the best PLF rates in the country with its coal-based plants recording a PLF of around 87% as compared to the national average of 75%.

What has driven performance in FY06?
Volumes drive topline:Growth in NTPC’s FY06 revenues has largely been a factor of the 8.3% YoY growth in volume sales, from 157 bn units in FY05 to 170 bn units in FY06. For 4QFY06, the company recorded a generation of 46 bn units, a growth of 9.1% YoY. NTPC’s coal based plants recorded a PLF of 87.54% during the quarter, marginally higher than 87.51% PLF that was recorded in FY05. During 4QFY06, NTPC commissioned a 500 MW unit at Rihand, thus taking its total capacity to 24,935 MW by the end of FY06. This is around 20% of the total installed capacity of India. Further, the company has recently taken over the Badarpur power plant in Delhi, adding 705 MW to the above-mentioned installed capacity.

Higher fuel costs dent margins: NTPC has recorded a 230 basis points (2.3%) contraction in operating margins during the fiscal, mainly on the back of rise in fuel costs, which have increased to 62.7% of sales in FY06, from 60.8% of sales in FY05. The company consumed 105 m tonnes (MT) of coal during FY06, including 3 MT of imports. Coal stock at the end of FY06 stood at 6.2 MT and, as indicated by the management, the company is progressing well towards developing the eight coal blocks allocated to it by the government. The first commercial production from these blocks is expected to begin by the start of 2008. The management has also indicated its concerns on the gas front where it is facing supply constraints. The company has tied up with Petronet LNG for supply of 1 MMTPA of LNG in order to overcome the shortages at the existing gas power plants.

Boiling down to the bottomline: The lacklustre performance on the bottomline front for both 4QFY06 and FY06 is mainly due to some one-time incomes that the company had booked during the fourth quarter of the previous fiscal. These one-time inflows amount to around Rs 9.5 bn and have come by way of write-back of provision on doubtful debt, one time surcharge income and inflow due to some tariff revisions. Excluding this impact from 4QFY05 profits, the actual bottomline growth for 4QFY06 and FY06 stand at 17% YoY and 20% YoY respectively.

What to expect?
At the current price of Rs 109, the stock is trading at a price to earnings multiple of 15.4 times its FY06 earnings. The board has recommended a dividend of Rs 0.8 per share (dividend yield of 0.7%). As the country’s largest power generating company and the main vehicle for increase in the country’s generation capacity over the next few years, we expect NTPC’s planned capacity addition to be the main driver for earnings growth in the future. However, fuel supply issues, especially with respect to gas, remain our major cause of concern.

We had recommended a ‘Buy’ on the stock in January 2006 at Rs 116 with a target price of Rs 160 from a two-year perspective. Since then, the stock has already touched Rs 145 and declined in line with the overall market. At the current price, therefore, we maintain our positive view on the stock.

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