Execution concerns

NTPC’s performance in the March quarter (Q4) based on provisional figures announced earlier this week has been impressive. Sales at Rs 14,488 crore were 18 per cent higher on year-on-year (y-o-y) basis, while the net profit (Rs 2,505 crore) increased 24 per cent.

The performance comes on the back of an increased capacity (1,500 Mw added in nine months ended December), better realisation (higher fuel costs a pass through) and higher return on equity due to full tax rates (higher than minimum alternate tax–MAT).

Growth of 16 per cent in 2010-11 revenues at Rs 53,720 crore was better than 2009-10 though profitability (net profit of Rs 8,826 crore up 1.1 per cent) remained muted due to weak performance in the first nine months of 2010-11. The company has disappointed on operational parameters, capex and capacity addition guidance in 2010-11.
 

FAIRLY VALUED
In Rs crore	FY10	FY11P	FY12E
Net sales	46,169	53,721	66,594
% chg	---	16.36	23.96
Net profit	8,728	8,826	9,904
% chg	---	1.12	12.21
EPS (Rs)	11.00	10.30	11.50
P/E (x)	16.73	17.86	16.00
P: Provisional; E: Estimates                                  Source: Analyst reports

Plant load factor for both coal and gas-based plants has come down significantly to 88 per cent (90.8 per cent) and 72 per cent (78 per cent) respectively. Kotak Institutional Equities’ report highlights that the PLF has fallen below 90 per cent for the first time in the past four years. Generation remained flat at 221 billion units, as the company has also been grappling with a low demand from financially weak state electricity boards, who feel better-off adopting power cuts.

NTPC added 79 per cent (2,490 Mw at group level) of the revised planned capacity of 3,150 Mw (4,150 earlier) in 2010-11. Out of the added capacity, only 65 per cent has been actually commissioned. Given the slippages, analysts are cautious about the company’s guidance of adding 4,320 Mw in 2011-12, compared to 5,000 Mw actually added in FY09-FY11. CEA (Central Electricity Authority) estimates that the company is likely to add only 3,000 Mw.

Similarly, capex of Rs 12,800 crore (standalone) in 2010-11 has been far below targeted Rs 22,300 crore in 2010-11 and there is strong expectation of slippages for 2011-12 capex guidance of Rs 26,700 crore.

There are downside risks to return on equity due to lower incentives (directly related to plant availability factor or PAF) for newly commissioned projects on account of fuel shortage, thanks to Coal India’s slippages in production targets, followed by shift to MAT. The company witnessed flat growth coal consumption in 2010-11 led by marginal fall in domestic coal even as gas availability has become a serious concern due to lower production by KG-D6 block of Reliance Industries. Besides PAF, fuel shortage will also affect the future pipeline of projects (14,750 mw under construction and 16,200 Mw under bidding stage), PLF and generation.

Though the company provides revenue visibility for next one decade with signing of power purchase agreements worth 100,000 Mw under regulated returns, analysts want to see execution on ground and company’s efforts to mitigate fuel risk. Analysts feel the stock is fairly priced at 16 times 2011-12 estimated earnings.