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NTPC: Hurt by fuel supply issues - Views on News from Equitymaster

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NTPC: Hurt by fuel supply issues
Jul 29, 2008

Performance summary
  • Sales grow by a marginal 6% YoY during 1QFY09.
  • Operating margins contract by a substantial 4.6% YoY, largely on the back of higher fuel expenses (as percentage of sales).
  • Net profits decline by 27% YoY, impacted by contraction in operating margins and substantially higher interest expenses. Excluding one-off adjustments, bottomline has grown by 5% YoY.


Financial performance snapshot
(Rs m) 1QFY08 1QFY09 Change
Sales 89,697 95,395 6.4%
Expenditure 62,752 71,177 13.4%
Operating profit (EBDITA) 26,945 24,218 -10.1%
Operating profit margin (%) 30.0% 25.4%  
Other income 7,181 7,172 -0.1%
Interest 278 4,219 1417.7%
Depreciation 4,914 5,524 12.4%
Profit before tax 28,934 21,647 -25.2%
Tax 5,235 4,381 -16.3%
Profit after tax/(loss) 23,699 17,265 -27.1%
Adjusted profit after tax/(loss) 17,648 18,580 5.3%
Net profit margin (%) 19.7% 19.5%  
No. of shares 8,246.0 8,246.0  
Diluted EPS (Rs)*   9.1  
P/E ratio (x)*   19.4  
* On a trailing 12-months basis

What has driven performance in 1QFY09?
  • NTPC added a 250 MW capacity in Bhilai during 1QFY09, which took the company’s total generation capacity to 29,394 MW at the end of June 2008. However, on account of reduced plant load factor (PLF – capacity utilisation) at its existing plant, the company recorded a 1.2% YoY decline in power generation (at 51 bn units). Its coal based plants operated at a PLF of 92.1% during 1QFY09, down from 94% in 1QFY08. The PLF of gas based plants also declined from 77.9% to 67.2% owing to low supply of gas and lower demand for power generated by using liquid fuels like naphtha (as this power is expensive than that generated using gas).

  • NTPC recorded a 4.6% YoY decline in its operating margins during 1QFY09, with the same coming down to 25.4%. This was owing to a substantial rise in fuel costs, which as percentage of sales increased from 59.3% in 1QFY08 to 64.3% in 1QFY09. Pressure on the supply front led to the increase in fuel costs during the quarter. The company received 28.7 m metric tonnes (MMT) of coal during the quarter, down from 29.5 MMT during 1QFY08. On the gas front, the supplies were 11.4 mmscmd as compared to 14.8 mmscmd during the corresponding quarter of the previous year. Had to purchase 2.4 mmscmd of gas in the spot markets where prices are fairly high as compared to contracted prices.

  • On the back of a lacklustre topline performance and contraction in operating margins, NTPC recorded a dismal performance on the bottomline front. The same declined by 27% YoY during the quarter. However, after adjusting profits for previous year sales, exchange rate variations, prior period items and wage provisions, the same have grown by 5% YoY during the quarter.

What to expect?
At the current price of Rs 177, the stock is trading at a multiple of 2.1 times our estimated FY11 book value per share for the company. NTPC is targeting an addition of 2320 MW of capacity during the current year and a total of 22,430 MW during the XIth five-year plan (FY08 to FY12). As seen from the adjacent graph, a large part of this target (64%) is back-ended i.e., outlined for the last two years of the plan period. In fact, even during the Xth plan period (FY03 to Fy07), almost 45% of the total capacity was added during the last two years. Given the fuel supply and equipment shortage that the power sector is facing currently, we expect some shortfall in NTPC’s planned capacity addition going forward. Though the management has outlined its plans on coal mining and changing the generation mix towards hydro and renewable power, the benefits will take a very long time to factor into the company’s performance.

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