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NTPC 2QFY07: First cut - Views on News from Equitymaster
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NTPC 2QFY07: First cut
Oct 30, 2006

Performance summary
NTPC, India’s largest power generating company, has announced decent results for the second quarter of FY07, reporting topline and bottomline growth of 15% YoY and 27% YoY respectively. Also, operating margins have expanded by a strong 510 basis points (5.1%), largely owing to lower other costs during the quarter and absence of rebate given to state electricity boards under the One Time Settlement scheme. The effect of higher operating margins has, however, been curtailed by a substantial rise in interest expenses, which have almost trebled on a YoY basis.

Financial performance: A snapshot…
(Rs m) 2QFY06 2QFY07 Change
Sales 59,259 68,138 15.0%
Expenditure 46,282 49,730 7.4%
Operating profit (EBDITA) 12,977 18,408 41.9%
Operating profit margin (%) 21.9% 27.0%  
Other income 6,315 6,505 3.0%
Interest 1,545 4,630 199.7%
Depreciation 5,280 4,780 -9.5%
Profit before tax 12,467 15,503 24.4%
Tax 832 764 -8.2%
Profit after tax/(loss) 11,635 14,739 26.7%
Net profit margin (%) 19.6% 21.6%  
No. of shares 8,246.0 8,246.0  
Diluted earnings per share (Rs)*   7.7  
P/E ratio (x)*   16.7  
* 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 24,640 MW, which is almost 20% of India's total installed capacity of 126,089 MW. The company also operated 1,054 MW of capacity through joint ventures. Fourteen of the company’s twenty-one 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 87% as compared to the national average of 75%.

What has driven performance in 1HFY07?
Higher generation to higher volumes: On the back of higher generation (8.7% YoY, NTPC recorded a 9.8%% YoY growth in volume sales during 2QFY07. This propelled the company’s topline growth of 17% YoY during the quarter. Higher generation was a combined result of improved PLF and additional capacities of 500 MW at Rihand and 705 MW at Badarpur.

On the capacity utilisation front side, NTPC’s stations achieved PLF of 82.6% in 2QFY07 (79.4% in 2QFY06). This was higher than the all India average PLF of 70.1% recorded during the quarter. The PLF of the company’s gas stations was 55.2% during 2QFY07 (60.2% in 2QFY06). This low PLF (against that of NTPC’s coal plants) was lower due to disruption in supply of gas as a result of floods in Gujarat. The impact on the PLF of gas stations for 1!HFY07 due to disruption in supply of gas was 5.4%, which was made up by an improvement in PLF to the extent of 8.8% through the use of spot regassified LNG.

OTS boost for margins: Investors should note that beginning FY04, under a One Time Settlement (OTS) scheme, 8.5% tax-free bonds were issued to NTPC to securitise receivables from the state electricity boards (SEBs). On the other hand, NTPC was supposed to provide incentive rebate to these SEBs for prompt payment. Now, post March 2006, the incentive rebate payable to prompt paying customer under the OTS scheme has ended, and the effect is seen on the company’s margins that have improved mainly on this account. The company has, however, introduced a new rebate scheme for prompt paying customers with effect from April 1, 2006. The management indicated during the analyst meet that realisations from the customers have been more than 100% for 2QFY07. Also, the servicing of the bonds under the OTS scheme is being made on time and the company expects the repayment of the bonds due from October 2006 to be on schedule. This shall provide NTPC with greater resources to fund its expansion plans.

Fuel costs increased marginally, from 62.2% of sales in 2QFY06, to 63.6% of sales in 2QFY07. The company consumed 51.3 m tonnes (MT) of coal during 1HFY07 (50.7 MT in 1HFY06). The management has indicated that, in order to meet the demand supply gap, NTPC will be importing 5 MT of coal during this fiscal (3 MT in FY06). Also, out of the eight coal-mining blocks that have been awarded to the company, the first is expected to be operational by the end of 2007.

Better margins, lower depreciation and tax aid bottomline: On the back of strong expansion in operating margins, NTPC recorded a bottomline growth of 27% YoY during 2QFY07. This growth was further aided by lower depreciation and tax outgo.

What to expect?
At the current price of Rs 129, the stock is trading at 2.0 times our estimated FY08 book value. While we remain confident of the company’s execution capabilities, we remain cautious on its mega expansion plans, considering that there are host of challenges surrounding the sector in terms of fuel and component availability, investments into transmission and deregulation of the distribution segment. Despite these, the fact that the company has raised its eleventh plan target for capacity addition is, in fact, a bold move. On a balance, we maintain our positive view on the stock, considering the company’s stable return profile and consistent cash generation abilities.

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