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NTPC: Leading the charge! - Views on News from Equitymaster
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NTPC: Leading the charge!
Dec 2, 2005

Performance Summary
NTPC, India’s largest power generating company, had recently reported strong results for the second quarter and first half ending September 2005. For 2QFY06, while revenues grew by 13% YoY, net profits were up over 6% YoY. The performance in 1HFY06 has been better with both the topline and the bottomline clocking growth of 15% YoY each. The company has, however, witnessed reduction in its operating margins for both the periods under consideration.

Financial performance: A snapshot…
(Rs m) 2QFY05 2QFY06 Change 1HFY05 1HFY06 Change
Sales 52,491 59,259 12.9% 104,404 119,826 14.8%
Expenditure 38,690 46,282 19.6% 77,329 91,423 18.2%
Operating profit (EBDITA) 13,801 12,977 -6.0% 27,075 28,403 4.9%
Operating profit margin (%) 26.3% 21.9%   25.9% 23.7%  
Other income 5,284 6,315 19.5% 10,667 11,843 11.0%
Interest 2,713 1,545 -43.1% 5,477 3,902 -28.8%
Depreciation 4,866 5,280 8.5% 9,651 10,153 5.2%
Profit before tax 11,506 12,467 8.4% 22,614 26,191 15.8%
Tax 566 832 47.0% 1,133 1,469 29.7%
Profit after tax/(loss) 10,940 11,635 6.4% 21,481 24,722 15.1%
Net profit margin (%) 20.8% 19.6%   20.6% 20.6%  
No. of shares 8,246.0 8,246.0   8,246.0 8,246.0  
Diluted earnings per share* (Rs) 5.3 5.6   5.2 6.0  
P/E ratio (x)         17.5  
(* annualised)            

What is the company’s business?
NTPC is the largest power generating company in India with a nationwide presence and an installed capacity of 23,749 MW, which is around 20% of India's total installed capacity. 13 of the company’s 20 plants are based on coal with the remaining 7 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 85% as compared to the national average of 73%.

What has driven performance in 2QFY06?
Higher volumes drive topline: Growth in NTPC’s 2QFY06 revenues has largely been a factor of the 4.3% YoY and 3.9% YoY growth in power generation and sales respectively. The company recorded a generation of 39.3 bn units (BU), during the quarter, taking the cumulative electricity generated during 1HFY06 to 80.7 BU, a 5.4% YoY growth over the generated volumes of 1HFY05. Notably, however, generation during the quarter was 5.2% lower on a sequential basis. The management has indicated that this was owing to the scheduled plant maintenance that is usually carried out during this part of the year. Further, the management has also clarified that there are certain grid restrictions during the months between July and September, which coincide with the monsoons in the country thus resulting in increased generation from hydel power stations resulting in lesser off stake of power from thermal stations, and consequently the lower capacity utilisation (plant load factor, or PLF). NTPC’s coal based plants recorded a PLF of 79.3% during the quarter, lower than 82.6% PLF that was recorded in 2QFY05.

During 2QFY06, NTPC commissioned a 500 MW unit at Rihand. Also, in August 2005, the company declared commercial two 500 MW units, one at Rihand and the other at Talcher. This takes NTPC’s generating capacity to 24,749 MW by the end of 1HFY06. This is around 20% in the total installed capacity of the country. The company is gradually moving in the direction of becoming a 45,000 MW plus company by the year 2012.

Higher fuel, maintenance costs dent margins: NTPC’s fuel costs have risen to over 62% of sales in 2QFY06, from below 60% of sales in 2QFY05. The company has also recorded a substantial rise in other expenditure, mainly on account of the plant maintenance work that is usually carried out during the second quarter, as indicated above. These have been the leading factors of the contraction in NTPC’s operating margins during the quarter and the first half. Reduction in staff costs has, however, pared the margin decline to some extent.

Boiling down to the bottomline:The decline in NTPC’s operating margins during the quarter has been the main reason for the lower growth in the company’s net profits. However, if one were to include certain adjustments (worth Rs 1.4 bn) with respect to regulatory and accounting changes, the net profit growth would have been higher at 20% YoY for 2QFY06.

What to expect?
At the current price of Rs 105, the stock is trading at a price to earnings multiple of 17.5 times its annualised 1HFY06 earnings. As the country’s largest power generating company and the main vehicle for increase in the country’s generation capacity over the next few years, we expect NTPC’s planned capacity addition to be the main driver for earnings growth in the future. And with a debt to equity ratio of just 0.4:1 as at the end of FY05, NTPC is in a strong position to power this growth process.

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