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NTPC: Higher fuel costs dent margins - Views on News from Equitymaster

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NTPC: Higher fuel costs dent margins

Jul 26, 2010

NTPC has declared its 1QFY11 results. The company has reported an 8% YoY growth in sales while net profit has declined by 16% YoY. Here is our analysis of the results.

Performance summary
  • Net sales grow by 8% YoY during 1QFY11.
  • Operating margins decline to 23.1% during the quarter, from 26.5% in 1QFY10. This is largely on account of higher fuel costs (as percentage of sales).
  • Led by weaker operating margins, lower other income, and higher depreciation & interest charges, net profit declines by 16% YoY during the quarter.

Financial performance snapshot
(Rs m) 1QFY10 1QFY11 Change
Sales 120,027 129,445 7.8%
Expenditure 88,270 99,578 12.8%
Operating profit (EBDITA) 31,757 29,867 -5.9%
Operating profit margin (%) 26.5% 23.1%  
Other income 7,763 5,849 -24.6%
Depreciation 6,128 6,827 11.4%
Interest 4,447 5,358 20.5%
Profit before tax 28,945 23,532 -18.7%
Tax 7,009 5,113 -27.0%
Profit after tax/(loss) 21,936 18,419 -16.0%
Net profit margin (%) 18.3% 14.2%  
No. of shares (m) 8,246.0 8,245.8  
Diluted earnings per share (Rs)*   10.2  
P/E ratio (x)*   19.8  
* On a trailing 12-months basis

What has driven performance in 1QFY11?
  • NTPC grew its sales by 8% YoY during 1QFY11. This was largely a result of improvement in power tariffs (as the company passed on a part of fuel cost hike to customers). Its power generation was up a marginal 1% YoY during the quarter. As for the PLF (plant load factor, or capacity utilisation) of NTPC's plants, it declined to 89.5% during the quarter, from 92.9% in 1QFY10.

  • NTPC's operating margins fell to 23.1% during the quarter, largely on account of higher fuel costs (as percentage of sales). These costs increased to 67.2% of sales in 1QFY11, from 64.5% in 1QFY10.

  • On the back of a lacklustre sales and weaker operating margins, NTPC's net profits declined by 16% YoY during the quarter. The pressure on profits was also on account of lower other income and higher depreciation & interest charges.

What to expect?
At the current price of Rs 198, the stock is trading at a multiple of 2 times our estimated FY13 book value per share. In the analyst meet held yesterday, NTPC's management outlined its plan for the year 2032, by when the company plans to take its generation capacity to a mammoth 128,000 MW (from 32,194 MW currently). This plan is possibly an extension of the company's earlier target of achieving 75,000 MW by 2017.

Given that NTPC has slipped up off late in executing its plan on time, we see the extension of the target (and that too, a much bigger one) as a way to buy time. This we do not see as making much sense given that such a huge target requires perfect execution capabilities and falling in line of several issues like fuel supply and pricing, and land availability among others. We maintain our ‘Hold' view on the stock.

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