NTPC: Good start to the year

National Thermal Power Corporation (NTPC) declared the results for the first quarter of financial year 2012-2013 (1QFY13). The company has reported 13% YoY growth in net sales and 20% YoY growth in profits for the quarter. Here is our analysis of the results.

Performance summary

• Net sales grow by 13% YoY in 1QFY13 despite very marginal growth in NTPC's generation volume.
• Operating margins improved slightly from 20.2% in 1QFY12 to 22.7% in 1QFY13, possibly due to lower fuel (coal) costs (as percentage of sales).
• Fall in other income and rise in interest costs dampened profit growth. The net profits, however, grew by 20% YoY in 1QFY13.
• The company had capacity of 34,810 MW at the end of June 2012 and is targeting capacity addition of 14,000 MW during the 12th plan period.

Standalone financial performance

(Rs m)	1QFY12	1QFY13	Change
Net sales	141,715	159,599	12.6%
Expenditure	113,053	123,294	9.1%
Operating profit (EBDITA)	28,662	36,305	26.7%
EBDITA margin (%)	20.2%	22.7%
Other income	9,963	8,848	-11.2%
Depreciation	6,411	7,602	18.6%
Interest	3,743	4,994	33.4%
Profit before tax	28,471	32,557	14.4%
Tax	7,714	7,573	-1.8%
Effective tax rate	27%	23%
Profit after tax/(loss)	20,757	24,984	20.4%
Net profit margin (%)	14.6%	15.7%
No. of shares (m)		8,245.5
Diluted earnings per share (Rs)*		11.7
Price to earnings ratio (x)		13.1

(*On a trailing 12-month basis)

What has driven performance in 1QFY13?

• Due to lower Plant Availability Factor (PAF) as well as Plant Load Factor (PLF, average capacity utilization), NTPC grew its sales by only 13% YoY during 1QFY13. The volume of electricity generated was 58.9 bn units in 1QFY13 which was 26% of the total generation (222 bn units) in FY12. Also the PLF of coal stations stood at 86.5% in 1QFY13 from 86.9% in 1QFY12. The operating margins however improved due to relatively lower coal costs. Going forward too we expect more consistent coal supplies and with that the margin pressures should gradually ease off.

  Currently, 90% of the company's fuel requirement is met domestically via its long-term contract with Coal India. NTPC meets the remaining 10-15% through imported coal, which is also expensive. NTPC's annual coal requirement is around 164 m tonnes. The fuel supply agreement with Coal India should relieve most of the problems. The company received 10.3% YoY higher coal supply from Coal India. It procured 34 MT which is approximately 20% of its total coal requirement for FY13.

  NTPC 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. In order to meet some of its future fuel requirements, the company is looking to produce 37 m tonne of coal (17% of its domestic fuel supply requirements) 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. The total capex on captive mines has been to the tune of Rs 8.8 bn by 1QFY13.

• NTPC's net profits grew by 20% YoY in 1QFY13 despite fall in other income and higher interest outgo. However, NTPC had debt to equity of 0.7 times and interest coverage ratio of 9.8 times in FY12 making it reasonably resilient to rise in interest costs.

• NTPC's debtor days reduced to 32 days at the end of 1QFY13 from 35 days in FY12. However, receivables from SEBs remain a concern. The management has reaffirmed that there has not been any default from SEBs (state electricity boards) till date. The company also has considerable receivables on its books (not provided for) to the tune of Rs 7.7 bn due from the government as compensation for one of the hydro power projects that have been discontinued due to ecological issues.

• NTPC's average power tariff was Rs.2.96/kwh for FY12 (Rs. 2.94/kwh for 1QFY13), ensuring least risk of power off-take in the sector. To put things into perspective, the fuel charges per kwh stood at Rs 2.02 while the fixed cost was Rs 0.92/ kwh.

What to expect?

At the current price of Rs 153, the stock is trading at a multiple of 1.5 times our estimated FY14 book value per share. Although NTPC's ambitious capacity expansion plans may be under achieved, the company's 27% share in country's power generation, with 18% of the national capacity makes it the biggest beneficiary of growth prospects in the sector. While the high debtor days and slow growth in generation volumes remain a concern, we see increased consistency in domestic coal supplies easing off margin pressures for the company. We believe that the current valuations factor in most of the downside risks. We reiterate our Buy view on the stock.