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NTPC: New rules impact profitability - Views on News from Equitymaster

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NTPC: New rules impact profitability

Aug 5, 2014

National Thermal Power Corporation (NTPC) declared results for the quarter ended June 2014. The company reported a 17% YoY growth in revenues while profits declined by 13% YoY. Here is our analysis of the results.

Performance summary
  • Standalone revenues rise by 17% YoY during the quarter ended June 2014.
  • Operating profits decline by 18% YoY on the back of higher fuel costs (as a percentage of sales; details discussed below)
  • Profit before tax declines at a sharper pace on the back of a lower operating profits as well as lower other income and higher depreciation charges,
  • A lower tax rate curbs the profit decline to 13% YoY. The lower tax rate is due to a provision of Rs 7.2 bn related to earlier years (nil for corresponding quarter last year).

Standalone financial performance
(Rs m) 1QFY14 1QFY15 Change
Net sales 156,941 183,368 16.8%
Expenditure 113,798 148,181 30.2%
Operating profit (EBDITA) 43,142 35,186 -18.4%
EBDITA margin (%) 27.5% 19.2%  
Other income 6,969 5,484 -21.3%
Depreciation 9,423 11,155 18.4%
Interest 6,174 6,679 8.2%
Profit before tax 34,514  22,836 -33.8%
Tax 9,244 824 -91.1%
Effective tax rate 27% 4%  
Profit after tax/(loss) 25,270  22,012 -12.9%
Net profit margin (%) 16.1% 12.0%  
No. of shares (m)   8,245.5  
Diluted earnings per share (Rs)*    12.9  
Price to earnings ratio (x)    10.9  
(*On a trailing 12-month basis)

What has driven performance in 1QFY15?
  • NTPC's coal based plant availability factor (PAF) stood at 89.3% during the quarter as compared to 84.85% in corresponding quarter last year. Plant load factor (PLF) for this quarter stood at about 85% as compared to 79.12% in corresponding quarter last year.

  • NTPC's revenues were up by 17% YoY during the quarter. Gross generation increased by about 6% YoY. However, as the coal supply situation remained flattish, the higher revenues were largely attributable to demand pick up, as mentioned by the management. The incentives earned by the company were lesser than that of last year mainly due to some of the older plants not being able to meet the new CERC norms - primarily heat rates and auxiliary power consumption. The company's operating margins were largely impacted due to the same as it was not able to recover fuel costs completely. Fuel costs stood at roughly 70% of revenues (unadjusted) as compared to 60% in corresponding quarter last year. Profits were lower by 13% YoY.

  • As per the management, the adjusted profit after tax stands at Rs 19.47 bn. Key adjustments include previous year income tax adjustments.
What to expect?
At the current price of Rs 141, NTPC is trading at about 1.1 times our estimated FY17 book value per share.

The company's management has made it clear that it looking to stick with its plans of adding capacities as well as acquire assets of selects private players' stranded power plants. It is currently evaluating the same and will look to finalise plans by the end of the year.

While the key issues surrounding the company - the case versus CERC regarding the tariff norms, the hearing date of which has been shifted to end August 2014 - it does seem that predicting the outcome of the case seems difficult and in all likelihood the case in expected to take time to resolve as the company's management has made it clear that it would be looking to take matters to Supreme Court if the outcome of the case is not as desired.

Nevertheless, we believe the current valuations provide a good amount of margin of safety coupled with the high dividend yield of 4%. We maintain our hold view on the stock from a long term perspective. We have arrived at a target price of Rs 190 from FY17 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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