NTPC: Buy :: Business Line

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The power sector has been weighed down over the past few years by two major concerns — inadequate coal availability and poor financial health of State electricity boards (SEBs), the chief buyers of power.

With domestic coal production falling short of demand, power companies have had to increasingly rely on costly coal imports to meet their needs for this key input.

In many cases, companies have not been able to pass on these higher costs, thus rendering power generation unviable.

Reduction in procurement by cash-strapped SEBs also forced power companies to undertake production cuts. But recent reforms in the sector such as hike in tariffs and restructuring of SEBs provide hope.

The travails of the power sector have rubbed off on the stock of NTPC, the country’s largest power generator. This is despite the company being insulated to a good extent from the troubles ailing its peers.

Further, the Government’s dilution of its stake in the company – at a discount to market price — impacted the stock. At the current price of Rs 140, the stock discounts its trailing earnings by around 10 times, much lower than its five-year average valuation of 16 times. On the business front, NTPC scores over peers on many factors.

FUEL SUPPLY COMFORT

Despite hiccups regarding quantity and quality of coal supplied, the company’s sourcing from Coal India has been largely uninterrupted.

NTPC’s dependence on costlier imported coal is limited. Of its projected requirement of 178 million tonnes of coal for FY-14, NTPC is expected to import 9 per cent.

Currently, more than 85 per cent of NTPC’s installed capacity is coal-based. The company sources most of its requirement from Coal India. Most of NTPC’s coal-based plants are located near the mines — this gives it a cost advantage over peers.

There was a stand-off between NTPC and Coal India over coal quality concerns. This resulted in holding back of payments to Coal India, leading to a temporary halt in supplies to two of NTPC’s plants in the Eastern region.

The signing of fuel supply agreements (FSA) for NTPC’s plants commissioned after March 2009 was also held up.

These disputes have now been resolved, with NTPC and Coal India agreeing to sign FSAs for plants that came up after March 2009. For those commissioned prior to that, FSAs are already in place. NTPC’s raw material needs should be better met in future with fuel supply agreements in place.

Captive coal mines that are expected to start production over the coming years would add to the company’s fuel security.

NTPC is undertaking development of six captive coal mines with capacity of 53 million tonnes per annum (mtpa). The company has also been recently allocated four new coal blocks with estimated capacity of 45 mtpa. This should help the company meet its fuel requirement for its expansion plans.

REGULATED TARIFFS

NTPC’s output is sold under long-term power purchase agreements at regulated tariffs. It is allowed to pass fuel costs to customers. So, an increase in cost of imported coal does not drag down its margins. Power is sold mainly to SEBs at tariffs based on regulations notified by the Central Electricity Regulatory Commission.

The tariffs provide for recovery of annual fixed cost (capacity charge) and fuel cost among other expenses. Full recovery of the capacity charge is allowed if plant availability is at least 85 per cent — a criterion NTPC’s coal plants meet. So, even if the buyer does not purchase the contracted quantity of power, the company recovers a good part of its costs. The company has no exposure to the volatile merchant power market.

OPERATIONAL STRENGTH

NTPC is on a strong footing, operationally and financially. Despite many SEBs being in financial trouble, the company has no trouble regarding payments. NTPC has the first right on the receivables of the SEBs it supplies to. The company’s power generation has been increasing, though marginally, over the past few years. In 2012-13 though, its generation rose 4.5 per cent to 231 billion units. NTPC’s plant load factor (capacity utilization), at 83 per cent in 2012-13 is ahead of the all-India average of 70 per cent.

The demand for power in the country is expected to grow strongly in the years ahead. Financial restructuring of the SEBs, if successfully carried out, should translate into better demand. NTPC with its size and expansion plans will benefit.

The company, which currently operates 41,184 MW capacity of power plants plans to add 14,038 MW in the 12th plan period (until 2017). NTPC’s capacity expansion last year (4,170 MW) — the biggest so far — accounts for 30 per cent of the 12{+t}{+h} plan period target. It has the financial muscle to fund this expansion.

Unlike many producers in the private sector, NTPC has low leverage with a consolidated debt-equity ratio of 0.8 times as on March 2013. The interest coverage ratio is comfortable at seven times. Cash of Rs 18,738 crore also gives comfort.

At the consolidated level, despite just 5 per cent growth in sales, the company’s operating profit and net profit (after adjusting for exceptional items) in FY-2013 grew 16.5 per cent and 12 per cent respectively.

This was an improvement over the single-digit growth in net profit posted in the earlier three years.

In the recent June quarter, lower demand from SEBs resulted in the company’s standalone sales declining 3 per cent. But a sharper fall in costs aided a 9.7 per cent growth in operating profit.