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NTPC 2QFY08: Our view - Views on News from Equitymaster
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NTPC 2QFY08: Our view
Oct 30, 2007

Performance summary
  • Sales grow 4% YoY in 2QFY08, 12% YoY in 1HFY08.
  • Operating margins contract by 1.3%, owing to higher staff costs (as percentage of sales).

  • Net profits grow 30% YoY during the quarter, largely aided by lower tax outgo. Effective tax rate reduces to 22.1% in 2QFY08 from 40.3% in 2QFY07.

Financial performance snapshot
(Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Sales 77,243 80,169 3.8% 152,188 169,757 11.5%
Expenditure 49,730 52,679 5.9% 101,306 115,431 13.9%
Operating profit (EBDITA) 27,513 27,490 -0.1% 50,882 54,326 6.8%
Operating profit margin (%) 35.6% 34.3%   33.4% 32.0%  
Other income 6,597 7,323 11.0% 13,042 14,613 12.0%
Interest 4,630 4,964 7.2% 9,868 5,242 -46.9%
Depreciation 4,780 5,134 7.4% 9,535 10,048 5.4%
Profit before tax 24,700 24,715 0.1% 44,521 53,649 20.5%
Tax 9,961 5,460 -45.2% 14,254 10,695 -25.0%
Profit after tax/(loss) 14,739 19,255 30.6% 30,267 42,954 41.9%
Net profit margin (%) 19.1% 24.0%   19.9% 25.3%  
No. of shares         8,246.0  
Diluted (unadjusted) EPS (Rs)*         9.9  
P/E ratio (x)*         23.5  
* 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 27,904 MW, which is almost 21% of India's total installed capacity of nearly 132,000 MW. Fifteen of the company’s twenty-two 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 89% as compared to the national average of 72%.

What has driven performance in 2QFY08?
Higher generation, volumes aid topline: NTPC grew its sales by 4% YoY during 2QFY08. This was largely on account of increased generation and volume sales. While the former grew by 6% YoY to 45.3 bn units (BUs), the latter grew by a marginally higher 6.4% YoY to 42.3 BUs during 2QFY08. However, the full effect of this growth in generation and sales was not seen in revenue growth due to the fact that average realisations witnessed a 2.5% YoY decline. Improvement in generation was a consequence of better capacity utilisation (PLF or plant load factor), which improved for both coal and gas based stations. While PLF for coal stations improved from 82.6% in 2QFY07 to 83.4% in 2QFY08, that for gas stations increased from 55.2% to 57.5%. Expansion in gas PLF can be attributed to purchases made by the company in the spot market.

Higher staff costs dent margins: NTPC recorded a 130 basis points (1.3%) contraction in its operating margins during 2QFY08. This was owing to higher staff costs, which increased from 3.5% of sales in 2QFY07 to 5.1% in 2QFY08. However, the pressure on margin was pared on account of lower fuel costs. As reported by the management, coal prices remained stable during the quarter. On the coal-mining front, the management is working seven coalmines (totaling 47 MTPA of production capacity) and production from its first mine (Pakri Barwadih, Bihar) will begin in 2008.

Lower taxes perk bottomline: Despite the contraction in operating margins, NTPC recorded a strong 31% YoY growth in net profits during 2QFYT08. This was largely on the back of lower taxes, as the company’s effective tax rate declined from 40.3% in 2QFY07 to 22.1% in 2QFY08.

What to expect?
At the current price of Rs 232, the stock is trading at a multiple of 3.0 times our estimated FY10 book value. The company has added 500 MW of capacity during the first half and has plans for a further 2,000 MW during this fiscal. During the eleventh plan period (FY08 to FY12), the management has indicated of adding over 22,300 MW of additional generation capacity. This, the management expects by way of greenfield projects, brownfield expansion, joint ventures and acquisitions. We shall soon update our research report on the company.

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