Stock Review: NTPC

 

INDIA's largest power-generating company NTPC posted a moderate third-quarter result. Its net profit was up just 1% while revenues grew 20% against the year-ago period. Operating margins were down, mainly due to the increasing number of new plants, which command lower tariffs that are calculated considering tax exemptions. However, increasing plant availability, commissioning of the 500MW Korba unit and pre-purchase agreement MoUs for 100GW were positive factors, although the company revised downwards its capacity installation plans for FY11.

   Extended monsoon and reduced offtake from the state electricity boards — major buyers of power from NTPC — impacted the company's overall capacity utilisation, also known as plant load factor. But, the plant availability factor was higher at 2.5%, which allowed it to earn incentives from customers and contributed to the 20% revenue growth. The target of 4,150MW for the fiscal has been revised downwards to 3,150MW. This indicates execution challenges will continue. The company expects to add another 1,650MW by the end of this fiscal through three new units, but it runs a slippage risk.

   The company works on a fixed return at 15.5% on equity model. This means, it considers all costs, including taxes, and then arrives at a tariff rate. With a chunk of the newly operational power generation capacities eligible for income-tax exemptions, the provisions of Minimum Alternate Tax (MAT) are likely to become applicable for NTPC in FY11. As a result, it booked revenues on the basis of tariffs arrived after considering an income-tax rate of 20%, lower than the tax rate of 34% it had assumed last year. This resulted in reduced operating profit margins and pressure on net profit during the year, which is likely to continue in near future.

   It has signed MoUs with various states and entered into power purchase agreements (PPAs) for 100GW on a cost-plus basis. The PPAs will protect the returns in the coming years, when increased power generation is expected to weigh down on tariffs. This protects the company from the unwillingness of state electricity boards to buy power at higher rates due to their deteriorating financials and a scenario where competitive bidding results in very low tariffs.

   NTPC's stock has been a laggard due to slow profit growth. Execution delays and fuel availability are the key concerns for the company. The current price-to-book valuation of 2.4 factors in these concerns and the downside risk appears limited.