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NTPC: Costs and receivables pile up - Views on News from Equitymaster

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NTPC: Costs and receivables pile up

Nov 1, 2011

NTPC declared the results for the second quarter and first half of financial year 2011-2012 (1HFY12). The company has reported 14% YoY growth both in net sales and in net profits for the half year period. Here is our analysis of the results.

Performance summary
  • Net sales grow by 14% YoY in 1HFY12 despite fall in NTPC's generation volume by 2.6% YoY for the second quarter of FY12.
  • Operating margins decline to 20.7% from 21.7% in 1HFY11. This is largely on account of higher fuel costs (as percentage of sales).
  • In addition to weaker operating margins, fall in other income dampened profit growth. The net profit margins, however, remained stable due to lower deprecation cost and interest outgo.
  • The company had capacity of 34,854 MW at the end of September 2011 and is targeting capacity addition of 4,320 MW in FY12.

Standalone financial performances
(Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Net sales 129,892 153,775 18.4% 259,337 295,490 13.9%
Expenditure 101,782 121,387 19.3% 203,169 234,439 15.4%
Operating profit (EBDITA) 28,110 32,388 15.2% 56,168 61,051 8.7%
EBDITA margin (%) 21.6% 21.1%   21.7% 20.7%  
Other income 23,662 10,094 -57.3% 29,580 20,058 -32.2%
Depreciation 17,688 6,582 -62.8% 24,517 12,994 -47.0%
Interest 3,995 3,311 -17.1% 7,410 7,055 -4.8%
Profit before tax 30,089 32,589 8.3% 53,821 61,060 13.5%
Tax 9,016 8,346 -7.4% 14,329 16,060 12.1%
Effective tax rate 30% 26%   27% 26%  
Profit after tax/(loss) 21,073 24,243 15.0% 39,492 45,000 13.9%
Net profit margin (%) 16.2% 15.8%   15.2% 15.2%  
No. of shares (m)         8,245.8  
Diluted earnings per share (Rs)*         11.7  
Price to earnings ratio (x)         15.3  
(*On a trailing 12-month basis)

What has driven performance in 1HFY12?
  • NTPC grew its sales by only 14% YoY during 1HFY12. This was largely a result of improvement in electricity tariffs, as the company volume sales did not have much to cheer about. The management has attributed the decline in volumes to 11% YoY fall in the receipt of domestic coal. This was was on account of excessive rains as well as the Telengana agitiation. Materialization of coal as against actual contracted quantity for 1HFY12 stood at 91.2% as against 94.5% in 1HFY11. Also the company received 12.62 mmscmd of gas in 2QFY12 as against 13.45 mmscmd in 2QFY11.

  • NTPC had capacity of 34,854 MW at the end of September 2011 and is targeting capacity addition of 4,320 MW in FY12. While the company has coal linkages for 9 new projects with a total capacity of 10,920 MW and a gas supply agreement for 14.5 MMSCMD of gas, fuel supplies remain a hindrance to growth. NTPC plans to import 23 MT of coal in FY12 against an import of 14 MT in FY11. The impact of higher fuel prices was seen in the decline in its capacity utilisation. While the utilisation (measured by PLF or plant load factor) for coal plants dropped from 86.5% in 1HFY11 to 83.4% in 1HFY12, PLF for gas plants remained stable at 92%. In order to meet some of its future fuel requirements, the company is looking to produce 45 m tonne of coal from its own mines by 2017. The Ministry of Coal will reallocate the five cancelled coal blocks to the company on which it has incurred Rs 5.6 bn as development costs.

  • NTPC's operating margins declined to 20.7% during 1HFY12, largely on account of higher fuel costs (as percentage of sales). These costs amounted to 69% of the net sales, as against 67% in 1HFY11.

  • Despite a fall in operating margins, NTPC's net profits grew by 14% YoY in 1HFY12 due to lower depreciation charges and interest outgo.

  • NTPC had debt to equity of 0.6 times and interest coverage ratio of 2.6 times making it reasonably resilient to rise in interest costs.

  • NTPC's debtor days increased to 69 days at the end of 1HFY12 from 33 days in 1HFY11. This is a major cause of concern. The management stated in the conference call that it currently receives only 30 to 40% of payments on the first day as against 60-70% earlier. However, it reaffirmed that there has not been any default from SEBs (state electricity boards) till date.

What to expect?
At the current price of Rs 178, the stock is trading at a multiple of 1.7 times our estimated FY14 book value per share. The company is targeting become a 1,28,000 MW by 2032 with 28% capacity from non-fossil sources. NTPC's share in country's generation was 27.4% in 2010-11, with 17.75% of the national capacity. It has planned capex of Rs 264 bn for FY12. While the high debtor days and pressure on margins remain a concern, we believe that the current valuations factor in most of the downside risks. We reiterate our positive view on the stock.

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