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NTPC: Lower fuel costs protect margins - Views on News from Equitymaster

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NTPC: Lower fuel costs protect margins
Jul 31, 2013

NTPC declared results for the quarter ended June 2013. The company reported a 3% YoY decline in revenues and a 1% YoY rise in profits during the quarter. Here is our analysis of the results.

Performance summary
  • Standalone net sales decline by 3% during the quarter ended June 2013.
  • Operating margins expand by 3.8% YoY leading to a 12.5% YoY rise in operating profits. Margin expansion on the back of lower fuel costs (as a percentage of sales).
  • Flat other income coupled with higher interest and depreciation charges lead to a slower 6% YoY increase in profits before tax.
  • A higher effective tax rate further slows down the profit growth rate to 1% YoY.

Standalone financial performance
(Rs m) 1QFY13 1QFY14 Change
Net sales 161,660 156,619 -3.1%
Expenditure 123,324 113,476 -8.0%
Operating profit (EBDITA) 38,335 43,142 12.5%
EBDITA margin (%) 23.7% 27.5%  
Other income 6,820 6,969 2.2%
Depreciation 7,602 9,423 24.0%
Interest 4,994 6,174 23.6%
Profit before tax 32,559 34,514 6.0%
Tax 7,573 9,244 22.1%
Effective tax rate 23% 27%  
Profit after tax/(loss) 24,987 25,270 1.1%
Net profit margin (%) 15.5% 16.1%  
No. of shares (m)   8,245.5  
Diluted earnings per share (Rs)*   13.3  
Price to earnings ratio (x)   10.4  
(*On a trailing 12-month basis)
What has driven performance in 1QFY14?
  • NTPC's plant availability factor stood at 87.4% during the quarter (1QFY14) as compared to 90.2% during the FY13. As per the company, a key reason for the lowering of the availability in the quarter was on account of plant maintenance. The same is also attributed to good monsoon season and power cuts from customers as has been reported by the media. Plant Load Factor (PLF, average capacity utilization) in the quarter stood at 79.1% across all plants. During FY13, the same stood at 83.1% for the full year.

  • NTPC's standalone revenues declined by 3% YoY largely on account of lower volume sales. However its operating profits grew by about 13% YoY as margins expanded by 3.8% YoY to 27.5%. Margin expansion was largely on account of lower fuel costs as a percentage of sales. At the profit before tax level, the figure was higher by 6% YoY on account of higher depreciation and interest costs. Further, a higher tax outgo led the profit growth to remain at a slow level of 1% YoY.

  • It may be noted that 1QFY14 quarter revenues include Rs 2.9 bn on account of items such as income from previous years and tax adjustments. This lowers the adjusted profit after tax to Rs 22.3 bn (down 11% YoY).

What to expect?

At the current price of Rs 138, the stock is trading at an attractive multiple of about 1.25 times our estimated FY15 book value per share. What may seem as an added bonus is the dividend yield which currently stands at over 4%. However, the company paid out a special dividend in the previous year (FY13). In FY12 the company paid a dividend of Rs 4 per share, which translates to a yield of about 2.8%.

As we have been stating for a while now, we believe NTPC continues to be the best bet from the generation space. While it has been in the news for a while now - for issues relating to fuel supply and linkages - it must be noted that this is an issue that a small portion of its overall capacity is facing.

The company is targeting to add capacity of 1,875 MW during FY14. As of March 2013, the same stood at 41,884 MW. The company plans to spend Rs 202 bn during the current year on capacity addition. Given its comfortable D/E position and higher interest coverage ratio, we do not expect funding as a concern. As such, all focus would be on expansion and execution.

Notwithstanding the short terms concerns related to plant efficiencies and fuel capacities, we believe the long term prospects of the company remain very strong. As India's largest and most efficient power generation company, we are optimistic on the long term prospects of the company and as such maintain our ‘buy' view on the stock from a from a long term perspective. We would like to remind subscribers that they should refrain from over exposure to a stock no matter how much of a low risk proposition it may seem. As such, do ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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