NTPC: Taxes take a toll on profits - Views on News from Equitymaster

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NTPC: Taxes take a toll on profits

Oct 23, 2009

Performance summary
  • Net sales grow by 12% YoY during 2QFY10, 19% YoY during the first half (1HFY10).
  • Operating margins expand by 3.4% YoY during the quarter, largely on account of lower employee costs (as percentage of sales).
  • Despite a strong 26% YoY growth in operating profits, net profit growth comes in at just around 2% YoY. Significantly higher taxes to blame for this. Effective tax rate in 2QFy10 stood at 22.3%, as compared to 5.8% in 2QFY09.
  • As per latest news reports, the government has cleared the way for a 5% stake sale in the company that will get it (the government) a consideration of around Rs 90 bn at the current market price.

Financial performance snapshot
(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Sales 96,614 107,828 11.6% 192,009 227,855 18.7%
Expenditure 71,138 75,691 6.4% 142,315 163,961 15.2%
Operating profit (EBDITA) 25,476 32,137 26.1% 49,694 63,894 28.6%
Operating profit margin (%) 26.4% 29.8%   25.9% 28.0%  
Other income 7,448 7,410 -0.5% 14,620 15,173 3.8%
Depreciation 5,267 6,438 22.2% 10,791 12,565 16.4%
Interest 5,264 5,407 2.7% 9,483 9,854 3.9%
Profit before tax 22,394 27,703 23.7% 44,041 56,648 28.6%
Tax 1,289 6,183 379.8% 5,670 13,192 132.7%
Profit after tax/(loss) 21,105 21,520 2.0% 38,370 43,456 13.3%
Net profit margin (%) 21.8% 20.0%   20.0% 19.1%  
No. of shares (m)       8,246.0 8,246.0  
Diluted earnings per share (Rs)*         10.6  
P/E ratio (x)*         20.4  
* On a trailing 12-months basis

What has driven performance in 2QFY10?
  • The 12% YoY growth in NTPC’s 2QFy10 sales was largely a result of the 7.5% YoY growth in volume sales of electricity. Higher volumes were a direct result of the 7% YoY increase in generation at the company’s power plants. The company commissioned a 500 MW capacity at Kahalgaon that aided the growth in generation during the quarter. Apart from that, the sharp increase in the PLF (plant load factor, or capacity utilization) of its gas based plants also added to the increased generation. As indicated by the management during its conference call, PLF of gas based plants rose from 58.2% in 2QFY09 to 76.9% in 2QFY10. Higher availability of gas was the reason these plants operated at higher PLF. As for NTPC’s coal based plants, PLF stood at 82.4% in 2QFY10, marginally lower than the 83.1% rate recorded in 2QFY09.

  • NTPC recorded a smart 3.4% YoY improvement in its operating margins during 2QFY10. This was helped by lower raw material costs (owing to lower cost of naphtha and gas) and lower employee costs. Employee costs, for instance, reduced from 6.3% of sales in 2QFY09 to 4.7% in 2QFY10. This was on account of lower provision towards the sixth pay commission requirements.

  • Despite the sharp improvement in operating margins, NTPC’s net profits managed a marginal 2% YoY growth during 2QFY10. The profits were impacted by a significantly higher tax payment. This was owing to a low base effect as the company had a large deferred tax write-back in 2QFY09, which was absent in 2QFY10. Subsequently, the company’s effective tax rate increased from 5.8% in 2QFY09 to 22.3% in 2QFY10.

What to expect?
At the current price of Rs 215, the stock is trading at a multiple of 2.4 times our estimated FY12 book value per share. NTPC’s first half numbers are fairly in line with our FY10 estimates. The company is on an aggressive capacity expansion and plans to spend massive sums of money on the same. For instance, capital expenditure in FY11 and FY12 are estimated at Rs 177 bn and Rs 240 bn respectively, which will be funded using a debt/equity ratio of 70/30. The company is also scouting for fuel sources (coal) abroad given the constraints it is facing from domestic resources. Overall, we have a cautious view on the stock.

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