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NTPC: Higher fuel, staff costs dent margins
Oct 24, 2008

Performance summary
  • Sales grow by 21% YoY during 2QFY09, 13% YoY during 1HFY09.

  • Operating margins contract by a substantial 7.9% YoY, largely on the back of higher staff and fuel costs (both as percentage of sales).

  • Net profits manage growth of 10% YoY during the quarter, chiefly aided by decline in tax expenses. Bottomline for the half year period posts a decline of 11% YoY.



Financial performance snapshot

(Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Sales 80,169 96,614 20.5% 169,757 192,009 13.1%
Expenditure 52,678 71,138 35.0% 115,431 142,315 23.3%
Operating profit (EBDITA) 27,490 25,476 -7.3% 54,325 49,694 -8.5%
Operating profit margin (%) 34.3% 26.4%   32.0% 25.9%  
Other income 7,323 7,448 1.7% 14,613 14,620 0.0%
Interest 4,964 5,264 6.0% 5,242 9,483 80.9%
Depreciation 5,134 5,267 2.6% 10,048 10,791 7.4%
Profit before tax 24,715 22,394 -9.4% 53,648 44,041 -17.9%
Tax 5,460 1,289 -76.4% 10,694 5,670 -47.0%
Profit after tax/(loss) 19,255 21,105 9.6% 42,954 38,370 -10.7%
Net profit margin (%) 24.0% 21.8%   25.3% 20.0%  
No. of shares       8,246.0 8,246.0  
Diluted EPS (Rs)*         8.4  
P/E ratio (x)*         15.4  
* On a trailing 12-months basis

What has driven performance in 2QFY09?
  • NTPC added 1,000 MW capacity during 2QFY09, which took the company’s total generation capacity to 27,850 MW at the end of September 2008. This helped the company grow its power generation by 4% YoY. Its coal based plants operated at a PLF of 83.1% during 2QFY09, down from 83.4% in 2QFY08. This was owing to plant shutdown due to maintenance activities as also on account of poor quality of coal received during the quarter.

  • NTPC recorded a 7.9% YoY decline in its operating margins during 2QFY09, with the same coming down to 26.4%. This was owing to a substantial rise in fuel costs, which as percentage of sales increased from 55.1% in 2QFY08 to 61.6% in 2QFY09. Pressure on the supply front led to the increase in fuel costs during the quarter.

  • On the back of contraction in operating margins, NTPC’s bottomline painted a poor picture in growing by a mere 10% YoY. The bottomline for first half actually declined by 11% on the back of lower operating margins. Lower tax expenses during both the periods under consideration how brought some respite to the company’s performance.

What to expect?
At the current price of Rs 152, the stock is trading at a multiple of 1.8 times our estimated FY11 book value per share for the company. NTPC has performed fairly in line with our topline estimates during the first half of FY09. However, the operating margins have come in lower than estimated on the back of higher than expected cost of fuel. We shall thereby update our research report on the company to factor in the same. NTPC plans to add 2,070 MW of new generation capacity during the ongoing second half of this fiscal. We however maintain our reservations with respect to these plans considering that the company is already facing fuel shortages.

Also given the equipment shortage that the power sector is facing currently, we expect some shortfall in NTPC’s planned capacity addition going forward. Though the management has outlined its plans on coal mining and changing the generation mix towards hydro and renewable power, the benefits will take a very long time to factor into the company’s performance.

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