Stock Review: NTPC

NTPC has posted lacklustre results yet again in the September 2010 quarter, with a marginal drop in net profit. This is the fifth consecutive quarter of sluggish performance; net profit had grown by 25% to 30% during the earlier period. Sales, excluding the prior-period adjustments, also dropped marginally, only the second instance in the last eight quarters. The outlook for the company continues to be subdued since it has not been able to push topline growth or contain the cost pressures. The key for the company lies in ensuring adequate supply of fuel, especially for its recently commissioned projects to maintain optimal capacity utilisation and protect margins, in the short term and expedite project execution in the medium term. While the sales showed a sharp jump of 20% during the September quarter, it was actually due to prior-period adjustments such as recognition of sales afterwards from the regulatory authority and similar items. If one were to discount these items, which propped up the topline by more than . 250 crore, sales has actually seen a drop of 3.3%. The performance has been partly affected by good monsoons, which leads to higher generation from hydel plants and, in turn, lower demand from thermal plants.

   To add to the woes caused by subdued sales performance, the company has also witnessed significant pressure on all major cost items, with fuel, employee and other costs increasing by 30% to 45%, leading to profit decline of 2.1%.

   The presence of a significant amount of non-recurring items shields the company's poor show. After excluding these items, pre-tax profit fell sharply by 18%. The non-recurring items relate to changes in depreciation accounting, which resulted in more than . 1,700 crore of revenue write-back and another provision of more than . 1,200 crore related to a regulatory order.

   Apart from the pressure on financials, the company has seen some operational issues also, including the scrapping of its 600 mw hydel project, where the company had already invested more than . 600 crore. While the government would largely compensate this amount, the decision seems to have generated a strategy re-think on the company's part, which is now looking at focusing more on its core competence of thermal power generation and overcoming the critical bottlenecks to faster project implementation and sufficient fuel supply.

   It would be interesting to see how the company shapes up in the next few quarters, with the change of guard at the helm.