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NTPC: Toned down growth prospects

Jun 19, 2012

National Thermal Power Corporation Limited. (NTPC) declared the results for the fourth quarter and financial year 2011-2012 (FY12). The company has reported 11% YoY growth in net sales and flat profits for the financial year. Here is our analysis of the results.

Performance summary
  • Net sales grow by 11% YoY in FY12 despite very marginal growth (0.69% YoY) in NTPC's generation volume during FY12.
  • Operating margins remain flat for full year period. However they improved from 23.5% in 4QFY12 to 25.3% in 4QFY11. This is largely on account of higher fuel costs (as percentage of sales).
  • In addition, fall in other income dampened profit growth. The net profits dropped by 7% YoY in 4QFY12, whereas for FY12 the profits were higher by a marginal 1.3% YoY.
  • The company had capacity of 37,014 MW at the end of March 2012 and is targeting capacity addition of 14,000 MW during the 12th plan period.
  • The company declared interim dividend of Rs 0.5 per share over and above interim dividend of Rs 3.5 per share (dividend yield 2.7%).

Standalone financial performance
(Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
Net sales 155,189 162,635 4.8% 548,740 611,448 11.4%
Expenditure 118,752 121,512 2.3% 432,916 480,025 10.9%
Operating profit (EBDITA) 36,437 41,123 12.9% 115,824 131,423 13.5%
EBDITA margin (%) 23.5% 25.3%   21.1% 21.5%  
Other income 6,714 7,681 14.4% 43,737 36,871 -15.7%
Depreciation 6,981 7,362 5.5% 24,856 27,917 12.3%
Interest 3,602 4,870 35.2% 14,209 17,116 20.5%
Profit before tax 32,568 36,572 12.3% 120,496 123,261 2.3%
Tax 4,749 10,639 124.0% 29,470 31,024 5.3%
Effective tax rate 15% 29%   24% 25%  
Profit after tax/(loss) 27,819 25,933 -6.8% 91,026 92,237 1.3%
Net profit margin (%) 17.9% 15.9%   16.6% 15.1%  
No. of shares (m)         8,245.5  
Diluted earnings per share (Rs)*         11.2  
Price to earnings ratio (x)         13.4  
(*On a trailing 12-month basis)

What has driven performance in FY12?
  • Due to lower Plant Availability Factor (PAF) as well as Plant Load Factor (PLF, average capacity utilization), NTPC grew its sales by only 11% YoY during FY12. The growth in volume was a marginal 0.69% YoY (from 220 BUs to 222BUs). Also the PLF improved to 91% in 4QFY12 from 83.69% in 3QFY12. The operating margins were primarily hurt by high coal costs. Going forward, however, we expect the margin pressures to gradually ease off.

    Currently, 90% of the company's fuel requirement is met domestically via its long-term contract with Coal India. NTPC meets the remaining 10-15% through imported coal, which is also expensive. NTPC's annual coal requirement is around 164 m tonnes. The government's decision to roll back a 12.5% rise in coal prices with the switch over to the new gross calorific value (GCV) based pricing system will, however, benefit NTPC the most going forward. The coal price rise was rolled back due to intense protests from the domestic coal consuming industry, led by power sector companies, including NTPC. NTPC spends around Rs 350 bn a year on purchasing 137 mt coal to fire 36,000 MW of installed capacity. The fuel cost accounts for 77% of NTPC's annual expenditure. Also around 56% of the company's annual fuel expenditure is directed at purchasing domestic coal. It is estimated that pricing under the GCV system would have doubled the company's coal cost to Rs 277 bn.

  • NTPC had one of the highest capacity additions in FY12. It added 2,820 MW in FY12 and surpassed the XI plan target of 9,220 MW (after mid-term appraisal), against which NTPC achieved 9,610 MW. The utility major had capacity of 37,014 MW at the end of March 2012 and is targeting capacity addition of 14,000 MW during the 12th plan period (2012-2017) including 2,160 MW spillover from 11th plan. Further, NTPC plans to have a portfolio of about 1,000 MW capacity through renewable energy sourcesby 2017. While the company has coal linkages for 9 new projects with a total capacity of 10,920 MW and a gas supply agreement for 14.5 MMSCMD of gas, fuel supplies remain a hindrance to growth. The impact of higher fuel prices was seen in the decline in its capacity utilisation. 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. The Ministry of Coal will reallocate the five cancelled coal blocks to the company on which it has incurred Rs 5.6 bn as development costs.

  • NTPC's net profits dropped by 7% YoY in 4QFY12 due to higher depreciation charges and interest outgo. However, NTPC had debt to equity of 0.8 times and interest coverage ratio of 2.6 times in FY12 making it reasonably resilient to rise in interest costs.

  • NTPC's debtor days increased to 69 days at the end of FY12 from 33 days in FY11. This is a major cause of concern. The management stated in the conference call that it currently receives only 30 to 40% of payments on the first day as against 60-70% earlier. However, it reaffirmed that there has not been any default from SEBs (state electricity boards) till date. The company also has considerable receivables on its books (not provided for) to the tune of Rs 7.7 bn due from the government as compensation for one of the hydro power projects that have been discontinued due to ecological issues.

What to expect?
At the current price of Rs 149, the stock is trading at a multiple of 1.5 times our estimated FY14 book value per share. Since NTPC has nearly halved its 12th plan capacity addition target from 29,000 MW to 14,000 MW, we do not see its longer term target of becoming a 1,28,000 MW by 2032 with 28% capacity from non-fossil sources, being achieved in the given time frame. Nonetheless, NTPC's 27% share in country's power generation in FY12, with 18% of the national capacity makes it the biggest beneficiary of growth prospects in the sector. While the high debtor days, slow growth in generation volumes and pressure on margins remain a concern, we believe that the current valuations factor in most of the downside risks. We reiterate our positive view on the stock.

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