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Monday, September 29, 2008

NTPC - ideal pick for long-term investors

NTPC’s existing operations, ongoing expansion plans and high profitability make it an ideal pick for long-term investors

Beta: 0.3
Institutional Holding: 6.7%
Dividend Yield: 2%
P/E: 21.2
M-Cap: Rs 143,554.2 cr
CMP: Rs 174.10
NATIONAL THERMAL Power Corporation (NTPC) is the largest power generation company in India and is currently the fourth most valuable company on the stock exchange. The stock has declined 35% from its January ’08 high, mirroring the fall in the Bombay Stock Exchange (BSE) Sensex. While the going has been tough for the equity market as a whole, this stock is among the few which provided decent returns to shareholders. This has been possible because of its strong operating capability, projects under execution and existing cash flows, which reduce NTPC’s dependence on borrowed funds. While the short-term outlook of the market continues to remain uncertain, investors can take exposure in the stock with a medium to long-term view.

BUSINESS: NTPC has a total capacity of about 30,000 mw, which includes 2,000 mw in joint ventures (JVs) and 5,500 mw in gas-based plants. The company is developing three hydel power plants, totalling 2,000 mw, as a diversification move.

NTPC is developing coal mines to shield itself from fluctuations in coal prices. It has been allotted coal blocks for captive use with reserves of three billion tonnes. Although the progress on this front is slow because of land and other related issues, in the medium term, this will provide definite gains to the company. NTPC will be able to internally source fuel worth about Rs 8,000 crore at current prices.

An important element of its operations is that it is selling power at Rs 1.84 per unit, as per the rules laid down by the power regulator, which is much lower than the spot price. As the market is freed up over a period of time, the company stands to gain the most.

Apart from seeking a diversification in fuel sources, NTPC is looking at both backward and forward integration. It is moving into the power equipment space through JVs with existing players, including Bharat Heavy Electricals (Bhel).

It has also acquired a 45% stake in a transformer manufacturing company. This is a significant strategic move, considering the shortage of equipment. The company has also launched an initiative to benchmark its operations with global peers. This move is likely to improve productivity and save costs. NTPC is also in talks with Kerala Industrial Development Corporation, for retail distribution of electricity in the state. This will mark its entry into the distribution segment.

NTPC has been on a rapid expansion spree over the past few years, during which, it invested around Rs 23,000 crore in fixed assets. Since it also generated cash of Rs 24,000 crore from operations, it did not have to raise extra cash from other sources. The company plans to invest nearly Rs 13,600 crore during FY09, over and above an investment of Rs 8,200 crore in FY08. Currently, a capacity of 16,180 mw is under construction, including 3,750 mw in JV companies, which will be completed by FY12. Of this, 2,800 mw will be completed in FY09, which can add about Rs 700 crore to the bottomline.

While such expansions may require high leveraging, NTPC looks well-placed with a reasonable debt-equity ratio of 0.52. This contrasts with a debt-equity ratio of 2.3, which is allowed for a generation company. This leaves enough room for the company to raise debt, if required. FINANCIALS: The June ’08 quarter was rather sluggish for NTPC, with sales growing at a modest pace of 6.4%, whereas net profit (PAT) dropped by 27%. However, the decline in PAT was due to a number of adjustments related to foreign exchange (forex) variation, sales adjustment and wage revision. Excluding these items, PAT has actually shown a growth of 5.3%.
While raw material costs rose 15%, other expenses shot up by 24%, leading to a decline of 18% in operating profit. Depreciation has gone up by 12%, with the commissioning of one of its plants.
For the full year ended March ’08, NTPC recorded sales growth of 13.7%, while profit growth was restricted to 8%, because of a sharp rise in employee cost and tax provisions.

OUTLOOK: With its existing operations, ongoing expansion plans and high profitability, NTPC is favourably placed in the generation space. The project execution experience has greater significance in a capital-intensive and long gestation business like this.

Further, the shortage in power supply, which is expected to remain in the medium term, will keep the capacity utilisation of power plants at a high level.

Given its initiative to become an integrated player, there is limited downside for the company in the current slowdown. Long-term investors can take an exposure in this stock.

CHALLENGES: Concerns regarding fuel supply — both coal and gas — remain. Further, issues related to land acquisition, especially affecting the development of coal mines and hydel plants, can delay the projects.

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