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NTPC: Powering India’s progress

Jul 31, 2006

Performance summary
NTPC, India’s largest power generating company, has announced decent results for the first quarter of FY07. The company has reported 18% YoY growth for both its topline and bottomline. Also, operating margins have expanded by 240 basis points, largely due to the absence of rebate given to state electricity boards under the One Time Settlement scheme. The effect of higher operating margins has, however, been pared by a substantial rise in interest expenses.

Financial performance: A snapshot…
(Rs m) 1QFY06 1QFY07 Change
Sales 60,567 71,536 18.1%
Expenditure 45,141 51,576 14.3%
Operating profit (EBDITA) 15,426 19,960 29.4%
Operating profit margin (%) 25.5% 27.9%  
Other income 5,528 6,369 15.2%
Interest 2,357 5,238 122.2%
Depreciation 4,873 4,755 -2.4%
Profit before tax 13,724 16,336 19.0%
Tax 637 808 26.8%
Profit after tax/(loss) 13,087 15,528 18.7%
Net profit margin (%) 21.6% 21.7%  
No. of shares 8,246.0 8,246.0  
Diluted earnings per share (Rs)*   7.4  
P/E ratio (x)*   16.2  
* On a trailing 12-months basis

What is the company’s business?
NTPC is the largest power generating company in India with a nationwide presence and an installed capacity of 25,140 MW, which is almost 20% of India's total installed capacity of 126,089 MW. The company also operated 1,054 MW of capacity through joint ventures. 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 87% as compared to the national average of 75%.

What has driven performance in 1QFY06?
Volumes drive topline: Growth in NTPC’s 1QFY07 revenues was a combined result of better capacity utilisation, higher generation and sales, and better realisations. As a matter of fact, the company’s generation grew by 8.8% YoY, from 41.4 bn units in 1QFY06 to 45.1 bn units in 1QFY07. Higher generation was a consequence of better capacity utilisation, or plant load factor (PLF). While coal based plants witnessed a marginal improvement in PLF, from 87.3% to 87.8%, the real improvement was seen on the gas based generation front. NTPC’s gas plants’ PLF increased from 68.1% in 1QFY06 to 73.1% in 1QFY07. The company has indicated that, beginning June 2006, it has started purchasing gas in the spot markets. This has seemingly improved supply of the input (regassified LNG), thus aiding higher utilisation levels.

During 1QFY07, NTPC commissioned a 500 MW unit at Rihand, thus taking its total capacity to 26,194 MW (owned and JV capacity). The company also took ownership of the 705 MW Badarpur power plant in Delhi, which it was managing earlier for the government. Further, during the quarter, the management has raised its eleventh plan (2007-12) capacity addition estimates from 17,333 MW to 21,941 MW, which will take the companys’ total generation capacity to over 51,000 MW. In order to diversify from coal based generation, the company is also working on / contemplating around 6,500 MW of hydro projects (4,500 in Arunachal Pradesh) in the eleventh plan period.

No OTS rebates aid margins: Investors should note that beginning FY04, under a One Time Settlement (OTS) scheme, 8.5% tax-free bonds were issued to NTPC to securitise receivables from the state electricity boards (SEBs). On the other hand, NTPC was supposed to provide incentive rebate to these SEBs for prompt payment. Now, post March 2006, the incentive rebate payable to prompt paying customer under the OTS scheme has ended, and the effect is seen on the company’s margins that have improved mainly on this account. The company has, however, introduced a new rebate scheme for prompt paying customers with effect from April 1, 2006. The management indicated during the analyst meet that realisations from the customers have been more than 100% for the 1QFY07. Also, the servicing of the bonds under the OTS scheme is being made on time and the company expects the repayment of the bonds due from October 2006 to be on schedule. This shall provide NTPC with greater resources to fund its expansion plans.

Fuel costs increased marginally, from 63.1% of sales in 1QFY06, to 63.8% of sales in 1QFY07. The company received 27 m tonnes (MT) of coal during the quarter (25 MT in 1QFY06) Further, the management has indicated that, in order to meet the demand supply gap, NTPC will be importing 5 MT of coal during this fiscal (3 MT in FY06). Also, out of the eight coal-mining blocks that have been awarded to the company, the first is expected to be operational by the end of 2007.

Interest costs affect bottomline: Despite a decent expansion in operating margins, the benefit was not carried on to the bottomline, mainly due to substantially higher interest costs (up 122% YoY). However, the management has indicated that there were certain one time incomes (of Rs 873 m) that were recorded in 1QFY06 and if one were to exclude these, on a like to like basis, the net profit growth for 1QFY07 stands increased to 27% YoY.

What to expect?
At the current price of Rs 119, the stock is trading at 1.9 times our estimated FY08 book value. While we remain confident of the company’s execution capabilities, we remain cautious on its mega expansion plans, considering that there are host of challenges surrounding the sector in terms of fuel and component availability, investments into transmission and deregulation of the distribution segment. Despite these, the fact that the company has raised its eleventh plan target for capacity addition is, in fact, a bold move. On a balance, we maintain our positive view on the stock, considering the company’s stable return profile and consistent cash generation abilities (true to its utility nature!).

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