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NTPC: All's well that ends well
May 31, 2007

Performance summary
  • FY07 standalone sales up 22% YoY, 10% higher than our estimates
  • Profit after tax grows by 18% YoY, lower by 5% as compared to our estimates
  • Consolidated sales, PAT up 23% YoY and 18% YoY respectively
  • Standalone operating margins expand by 4.7% in FY07, owing to decline across all cost heads (as percentage of sales)
  • Board recommends final dividend of 80 paise (dividend yield of 0.5%)

Standalone financial performance snapshot
(Rs m) 4QFY06 4QFY07 Change FY06 FY07 Change
Sales 77,190 88,603 14.8% 267,292 326,317 22.1%
Expenditure 55,373 65,206 17.8% 197,244 225,385 14.3%
Operating profit (EBDITA) 21,817 23,397 7.2% 70,048 100,932 44.1%
Operating profit margin (%) 28.3% 26.4%   26.2% 30.9%  
Other income 6,274 6,864 9.4% 26,101 27,490 5.3%
Interest 2,854 5,919 107.4% 9,585 18,594 94.0%
Depreciation 5,261 6,081 15.6% 20,477 20,754 1.4%
Profit before tax 19,976 18,261 -8.6% 66,087 89,074 34.8%
Tax 4,313 914 -78.8% 7,885 20,427 159.1%
Profit after tax/(loss) 15,663 17,347 10.8% 58,202 68,647 17.9%
Net profit margin (%) 20.3% 19.6%   21.8% 21.0%  
No. of shares         8,246.0  
Diluted earnings per share (Rs)         8.3  
P/E ratio (x)         19.2  

What is the company’s business?
NTPC is the largest power generating company in India with a nationwide presence and an installed capacity of 26,350 MW (including 1,054 MW through joint ventures), which is almost 20% of India's total installed capacity of nearly 130,000 MW. Fourteen of the company’s twenty-one owned plants are based on coal with the remaining seven 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 90% as compared to the national average of 75%.

What has driven performance in FY07?
Strong utilisations aids growth: The 22% YoY growth in NTPC’s FY07 sales was on the back of higher volume sales (up 11% YoY) and improvement in realisation. Higher sales were a consequence of the 18% YoY growth in commercial generation during the fiscal. This was made possible by the substantial improvement in the PLF (plant load factor, or capacity utilisation) of the company’s coal and gas based generating units. While PLF of coal-based plans improved from 87.5% in FY06 to 89.4% in FY07, that for gas-based plants improved from 65.8% to 74.9%. The strong rise in gas PLF can be attributed to purchases of gas made by the company in the spot market (it purchased 4.7 mmscmd of gas in the spot markets in FY07).

As reported by the management, NTPC’s has added 7,155 MW of new generation capacity in tenth plan (2002-07), which is around 8% lower than the target of 7,710 MW. For the next two fiscals, the company is working on capacities totaling 5,100 MW. This excludes the progress on hydro plants, where the company is currently working in 1,920 MW of capacities.

Lower costs aid margins: Against 3% of sales paid as rebate under One Time Settlement (OTS) scheme in FY06, the absence of this cost in FY07 has aided NTPC’s operating margins, which have expanded by a sharp 4.7%. Lower fuel and staff costs (each as percentage of sales) have also helped matters in this regard. NTPC is sourcing gas in the spot market in a price range of US$ 10.5 to US$ 11.5 per MMBTU. Also, as reported by the management, coal prices have remained stable during the fourth quarter. On the coal mining front, the management has indicated that coal production from its first mine will begin sometime at the end of this year.

Higher interest and tax outgo pares bottomline growth: Despite the expansion in operating margins, higher interest costs and tax charges weakened NTPC’s net profit growth during FY07. As a matter of fact, the company’s effective tax rate increased from 12% in FY06 to 23% in FY07.

What to expect?
At the current price of Rs 158, the stock is trading at a multiple of 2.2 times our estimated FY09 book value. The company’s performance is almost in line with our estimates. Especially heartening is the fact that it has managed to ramp up the capacity utilisation of its gas based stations by way of spot purchases of the fuel. While its has missed its tenth plan generation capacity addition target by a whisker, investors can still take comfort from the fact that the company seems in line of meeting its targets for the next 2 years. We shall soon update our research report on the company.

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