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NTPC: Imported fuel hurts margins - Views on News from Equitymaster
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NTPC: Imported fuel hurts margins
Nov 1, 2013

NTPC declared its results for the quarter ended September 2013. The company reported flat revenues while profits declined by 21% YoY during the quarter. Here is our analysis of the results.

Performance summary
  • Standalone revenues increase by 0.4% YoY in 2QFY14.
  • Operating profits decline by 5% YoY as margins contract on account of lower PLFs coupled with higher fuel costs.
  • Lower other income, coupled with higher depreciation and interest costs lead to a 21% YoY decline in profits.

Standalone financial performance
(Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Net sales 163,513 164,154 0.4% 325,173 320,773 -1.4%
Expenditure 118,985 121,635 2.2% 242,309 235,111 -3.0%
Operating profit (EBDITA) 44,529 42,519 -4.5% 82,864 85,662 3.4%
EBDITA margin (%) 27.2% 25.9%   25.5% 26.7%  
Other income 8,196 6,440 -21.4% 15,016 13,409 -10.7%
Depreciation 7,865 9,679 23.1% 15,467 19,103 23.5%
Interest 3,035 6,205 104.5% 8,028 12,379 54.2%
Profit before tax 41,825 33,075 -20.9% 74,384 67,589 -9.1%
Tax 10,402 8,146 -21.7% 17,974 17,390 -3.2%
Effective tax rate 25% 25%   24% 26%  
Profit after tax/(loss) 31,424 24,929 -20.7% 56,410 50,199 -11.0%
Net profit margin (%) 19.2% 15.2%   17.3% 15.6%  
No. of shares (m)         8,245.5  
Diluted earnings per share (Rs)*         12.5  
Price to earnings ratio (x)         11.7  
(*On a trailing 12-month basis)

What has driven performance in 2QFY14?
  • NTPC's plant availability factor (PAF) for its coal based plants stood at 87.5% during the quarter ended September 2013 and at 86.2% for the first half of the year. PLFs stood at 60.41% (for all thermal plants) during the quarter. For coal plants, the same stood at 75.9% in the quarter as compared to 74.9% during same period last year.

  • NTPC's revenue growth remained flat during the quarter. Despite higher PAF and an increase in generating capacity, the lower PLFs were on the back of lower demand from SEBs in additional to the company finding it difficult to pass on costs, thereby impacting NTPC's margins and revenues. The company's operating profits declined by 5% YoY on the back of higher fuel costs and other expenditure (as a percentage of sales). This is largely due to the higher usage of imported fuel. At the profit before tax level, the figure was lower by 21% YoY on account of higher depreciation and interest costs coupled with lower other income.

  • As per the management, the adjusted profit after tax growth stands at 9.3% YoY. The adjustments include payments from customers for earlier years as well as the interest payments.

What to expect?

At the current price of Rs 148, the stock is trading at an attractive multiple of about 1.34 times our estimated FY16 book value per share. It must be also kept in mind that the current dividend yield stands at a fairly decent figure of about 2.7% (not including special dividend of last year).

As we have been stating for a while now, we believe NTPC continues to be the best bet from the generation space. While it has been in the news for a while now for issues relating to fuel supply and linkages it must be noted that this is an issue that a small portion of its overall capacity is facing. Plus, the company has been making efforts to improving its fuel supply chain by importing its requirements through the waterway (which would improve the uncertainty surrounding fuel supply at two major plants, thereby freeing up its exiting supply from CIL for other plants) also, with improving efficiencies and more availability, the company would benefits from the pass through mechanism.

As India's largest and most efficient power generation company, we are optimistic on the long term prospects of the company. However, given the sharp run up in prices in the past few weeks, we recommend investors to hold on to the stock.

We would like to remind subscribers that they should refrain from over exposure to a stock no matter how much of a low risk proposition it may seem. As such, do ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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