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NTPC: Powering its way ahead!

Jun 20, 2005

Performance summary
NTPC, India's largest power generating company, had recently announced results for the fourth quarter and year ending March 2005. For FY05, while revenues have grown YoY by 20%, net profits are up 10%. The performance in 4QFY05 has been better with bottomline growth of 67% YoY overpowering the 23% YoY growth in topline. Importantly, the company has substantially expanded its operating margins for both the periods under consideration.

Financial performance: A snapshot…
(Rs m) 4QFY04 4QFY05 Change FY04 FY05 Change
Sales 52,308 64,269 22.9% 188,684 225,650 19.6%
Expenditure 49,095 46,365 -5.6% 168,127 164,952 -1.9%
Operating profit (EBDITA) 3,213 17,904 457.2% 20,557 60,698 195.3%
Operating profit margin (%) 6.1% 27.9%   10.9% 26.9%  
Other income 21,695 13,414 -38.2% 70,958 29,810 -58.0%
Interest 4,478 2,264 -49.4% 12,386 10,142 -18.1%
Depreciation 5,330 4,952 -7.1% 20,232 19,584 -3.2%
Profit before tax 15,100 24,102 59.6% 58,897 60,782 3.2%
Tax 1,341 1,168 -12.9% 6,289 2,712 -56.9%
Profit after tax/(loss) 13,759 22,934 66.7% 52,608 58,070 10.4%
Net profit margin (%) 26.3% 35.7%   27.9% 25.7%  
No. of shares 8,246.0 8,246.0   8,246.0 8,246.0  
Diluted earnings per share* (Rs) 6.7 11.1   6.4 7.0  
P/E ratio (x)         11.8  
(* annualised)            

What is the company's business?
NTPC is the largest power generating company in India with a nationwide presence and an installed capacity of 23,749 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 85% as compared to the national average of 73%.

What has driven performance in FY05?
Generation drives topline:  The growth in NTPC's FY05 revenues has largely been a factor of the 20% YoY growth in the generation business of the company. The company has recorded a generation of 159.1 bn units (BUs), showing an increase of 6.7% over the previous year's generation of 149.2 BUs. This rise in generation was a result of the company's stations recording an all time high PLF (plant load factor or capacity utilisation) of 87.5%, which is the highest for any financial year since its inception.

  FY04 % of total FY05 % of total Change
Generation
Revenue 188,371 99.8% 225,317 99.9% 19.6%
PBIT 29,179 99.5% 49,467 99.6% 69.5%
PBIT margin 15.5%   22.0%    
Others
Revenue 313 0.2% 333 0.1% 6.4%
PBIT 151 0.5% 188 0.4% 24.5%
PBIT margin 48.2%   56.5%    
Total
Revenue 188,684   225,650   19.6%
PBIT 29,330   49,655   69.3%
PBIT margin 15.5%   22.0%    

With a generating capacity of 23,749 MW, the company has a share of over 20% in the total installed capacity of the country. The fiscal saw the company adding 2,000 MW (17.5 BUs) of generation capacity. Further, as per an earlier press release, NTPC has plans to become a 45,000 MW plus company by the year 2012, which means a CAGR of 9.6%. These plans form part of the government's larger plan of adding 100,000 MW during the tenth (2002-07) and eleventh (2007-12) five year plans. However, considering the current pace of additions, we are skeptical of the government reaching the above stated goals, especially when the capacity addition target for the tenth plan has been revised downwards.

Lower fuel costs lead margin expansion:  NTPC's fuel costs have reduced to 61% of sales in FY05 from 65% of sales in FY04. This has been the guiding factor of the expansion in the company's operating margins during the fiscal. Reduction in staff costs and other expenses has also led the margin expansion during both 4QFY05 and FY05.

Reduced other income pares bottomline growth:  Despite the strong expansion in operating margins, the net profit margins of NTPC have contracted during the fiscal. This has been mainly a result of the 58% lower other income recorded during the year. But for a sharp decline in tax outgo, the net profit growth could have been lower still.

What to expect?
At the current price of Rs 83, the stock is trading at a price to earnings multiple of 11.8 times FY05 earnings. The board of the company has recommended a dividend of Rs 1.2 per share (dividend yield of 1.4%). 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.

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