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NTPC: Mega plans on the anvil
Jul 31, 2007

Performance summary
  • Sales grow 20% YoY in 1QFY08, led by higher capacity and improved utilisation.

  • Operating margins contract by 130 basis points (1.3%), owing to higher staff costs (as percentage of sales).

  • Net profits spike 53% YoY due to adjustments on account of previous year sales, forex variations and wage revisions. Adjusted PAT up 15% YoY - aided by lower interest costs and reduced effective tax rate.

  • Acquires 45% stake in Transformers and Electricals Kerala Ltd. from the government of Kerala – TELK is in the business of manufacturing, marketing and servicing of power transformers, circuit breakers and shunt reactors.

Financial performance snapshot
(Rs m) 1QFY07 1QFY08 Change
Sales 75,021 89,697 19.6%
Expenditure 51,576 62,752 21.7%
Operating profit (EBDITA) 23,445 26,945 14.9%
Operating profit margin (%) 31.3% 30.0%  
Other income 6,369 7,181 12.7%
Interest 5,238 278 -94.7%
Depreciation 4,755 4,914 3.3%
Profit before tax 19,821 28,934 46.0%
Tax 4,293 5,235 21.9%
Profit after tax/(loss) 15,528 23,699 52.6%
Adjustments 210 6,051  
Comparable profit after tax 15,318 17,648 15.2%
Net profit margin (%) 20.7% 26.4%  
No. of shares   8,246.0  
Diluted (unadjusted) EPS (Rs)*   9.3  
P/E ratio (x)*   17.3  
* 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 27,904 MW, which is almost 21% of India's total installed capacity of nearly 132,000 MW. Fifteen of the company’s twenty-two 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 89% as compared to the national average of 72%.

What has driven performance in 1QFY08?
Capacity addition, better utilisations aids topline: NTPC added 3,155 MW of new capacity during the past 12 months (inclusive of takeover of the 705 MW Badarpur plant from the Delhi government and 740 MW of the Ratnagiri JV representing the ailing Dabhol power plant). This, alongwith improved utilisation of existing capacity, helped the company rake in a 20% YoY growth in sales during 1QFY08. PLF (plant load factor, or capacity utilisation) of the company’s coal based plants improved from 88% in 1QFY07 to nearly 94% in 1QFY08. Major improvement was also seen in the PLF of gas-based plants, with the same rising from 72% YoY in 1QFY07 to 78% in 1QFY08. Expansion in gas PLF can be attributed to purchases made by the company in the spot market. On the back of capacity addition and higher utilisation, the company’s generation volumes grew 13% YoY during 1QFY08.

XIth Plan capacity addition targets (2007-2012)
  Thermal      
(MW) Coal Lignite Gas Hydro Nuclear Total
Central # 24,310 1,000 1,454 9,685 3,380 39,829
State 23,135 450 762 3,605 - 27,952
Private 5,460 - 2,037 3,263 - 10,760
Total 52,905 1,450 4,253 16,553 3,380 78,541
# NTPC to contribute 57% of the central sector share by adding 22,600 MW during the XIth Plan;
Source: Company presentation

Higher staff costs dent margins: NTPC recorded a 130 basis points (1.3%) contraction in its operating margins during 1QFY08. This was owing to higher staff costs, which increased from 3.6% of sales in 1QFY07 to 6.7% in 1QFY08. However, the pressure on margin was pared on account of lower fuel costs. As reported by the management, coal prices remained stable during the quarter. On the coal-mining front, the management is working seven coalmines (totaling 47 MTPA of production capacity) and production from its first mine (Pakri Barwadih, Bihar) will begin in 2008.

Adjustments prop bottomline:NTPC’s net profits spiked 53% YoY in 1QFY08, largely due to certain adjustments on account of previous year sales, forex variations and wage revisions. These adjustments totaled Rs 6 bn in 1QFY08 against Rs 210 m in 1QFY07. Adjusting for these, the PAT growth stood at 15% YoY for the quarter. This growth was aided by lower interest costs and reduced effective tax rate.

Alliance with TELK: During 1QFY08, NTPC forged an alliance with Transformers and Electricals Kerala Ltd (TELK), a Government of Kerala company with expertise in the business of manufacture, marketing and servicing of power transformers, current voltage transformers, circuit breakers, and shunt reactors. The company has agreed to acquire 44.6% stake in TELK from the Government of Kerala. This initiative is in line with the company’s plans of backward integration by way of having a manufacturing presence in power plant equipment business.

What to expect?
At the current price of Rs 161, the stock is trading at a multiple of 2.1 times our estimated FY10 book value. With respect to the first quarter performance, the fact that NTPC has managed to ramp up the capacity utilisation at an aggressive rate is heartening. The management has indicated of a XIth Plan target addition of 22,600 MW (around 4,500 MW per year), which shall take the company’s generation capacity to near the 50,000 MW levels (target for 2017 stands at 75,000 MW). This, the management expects by way of greenfield projects, brownfield expansion, joint ventures and acquisitions. The company is also diversifying into segments like power equipment manufacturing, coal mining, power trading, oil/gas exploration, renewable and nuclear energy, which shall change the business matrix and growth potential. Consistent fuel supplies, however, remain a concern.

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