NTPC - Write-backs boost reported income. :: Kotak Sec

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NTPC (NATP)
Utilities
Write-backs boost reported income. NTPC reported net income of Rs21 bn for
2QFY11, boosted by write-back of depreciation previously provided due to a change in
accounting policy, and other prior period items. Adjusted PAT met estimates, though
we need to ascertain the tax implications of various provisions made. We maintain our
REDUCE rating and target price of Rs210/share and highlight that NTPC continues to
lag capex guidance suggesting further delays in project execution.


Reported numbers marred by one offs and prior period items
NTPC reported revenues of Rs129.9 bn, operating profit of Rs17.5 bn and net income of Rs21.1
bn against our estimate of Rs124.2 bn, Rs27.7 bn and Rs16.3 bn, respectively. We note that
reported numbers were distorted by a number of one offs and prior period items which we discuss
in greater detail below. Adjusting for prior period items, net sales at Rs126 bn were ahead of our
estimates primarily on account of higher-than-estimated fuel cost. Estimated gross generation for
2QFY11 was 52.2 BU, a sequential decline of 7% primarily on account of lower PLFs during the
quarter despite commercial generation from Dadri (490 MW.
Adjusting for one offs and prior period items, results broadly in line
Reported revenues were ahead of our estimate primarily due to (1) prior period sales of Rs1.8 bn
recognized during the quarter and (2) Rs770 mn of income tax recoverable from customers.
Further, provisioning of Rs12.6 bn with respect to debtors led to significantly lower-than-estimated
EBITDA. Reported PAT was significantly ahead of our estimates, primarily on account of NTPC
retrospectively changing its depreciation policy (with effect from April 2009) aligning it with CERC
notified depreciation rates. As a result, the write back of prior period depreciation amounting to
Rs10.2 bn and excess AAD amounting to Rs7.4 bn were recognised as income during 2QFY11. We
seek clarity on the tax implications on account of the various provisions and write-backs.
Retain REDUCE rating with a target price of Rs210/share
We retain our REDUCE rating on NTPC with a target price of Rs210/share based on March 2012
valuations. NTPC currently trades at 2.2X FY2012E book value and 14X FY2012E earnings which is
a rich premium to the valuation of regional utilities (1.4X book value and 12.5X earnings). We see
some downside risk to our earnings estimate and will revisit our assumptions after the earnings call
organized by the company.