India’s largest power generation company, NTPC, continued its poor show in June 2010 quarter.

Though the company met analysts’ expectations on the revenue front but has significantly and phenomenally underperformed in terms of operating profit and net profit respectively, partly due to a high base last year.

Sales (including other operational income) rose 6.2 per cent on a y-o-y basis came to Rs 13,303 crore, and was in line with expectations. Analysts expected NTPC to report a muted 2-5 per cent volume growth as no significant capacity expansions have been done in the last one year.  Says Satyam Agarwal, analyst, Motilal Oswal, “NTPC's net generation increased 1.8 per cent y-o-y to 18.4 billion units in June 2010 quarter (Q1FY11) largely due to improved gas availability while plant load factor (PLF) for thermal-based projects was down 122 basis points (bps) at 91 per cent.&" The same had come down by 110 bps to 91.4 per cent in FY10 due to forced outages.

The company has shown a decline of 10 per cent in operating profit (against analysts’ expectations of a 4.2 per cent rise) to Rs 3,345 crore after eight quarters thanks to 13 per cent rise in overall costs. Fuel costs as a percentage to sales showed a biggest jump of 360 basis points (bps) y-o-y to 65.4 per cent, thanks to rise in coal prices. More than 85 per cent of its total capacity at 31,700 mw is coal based.  The operating performance is poor despite the company being a pure regulated player with full pass-through of escalated costs. However, decline in operating profit could be partly due to a 53 per cent jump in June 2009 quarter.

Net profit decline of 4.5 per cent y-o-y in March 2010 quarter continued and gathered pace in Q1FY11 as the same declined by 16 per cent y-o-y at Rs 1,842 crore. Though taxation has gone down by 27 per cent at Rs 511 crore, fixed costs (interest plus depreciation) has increased by 15.2 per cent to Rs 1,219 crore, while other income declined by 9.6 per cent to Rs 227 crore.

NTPC is executing power capacity addition of 17,830 mw, which would increase its total capacity by half in next 2-3 years. But the company has spent only 33 per cent of the total capital outlay towards these projects till date. It has guided for capacity addition of 11,000mw in FY11-FY12 (4150 mw in FY11 and 7000mw GW in FY12). However, analysts expect less than half of it (6000mw) to be added given its past track record. There could also be delays due to re-bidding of the bulk tender order of 7260mw after Larsen and Toubro was disqualified. The total capacity addition in FY10 was 1500mw as against 3,300 mw targeted.

NTPC needs 130 million tonnes of coal annually and it will need to import 12-15 million tones in FY11. The company is doing various attempts for this such as joint venture with Coal India, acquisition of mines abroad (Indonesia, Australia and South Africa). However, this is not easy as there is lot of competition as many companies from the private sector are doing the same. Funding is not an issue either for capacity additions (Rs 29,000 crore needed in FY11) or acquisitions of coal mines as the company is sitting on cash reserves of Rs 18,000 crore.

 
Overall, analysts are not bullish on NTPC due to delay and poor track record in capacity additions and muted financial performance. Moreover, the stock trades at 15 times and 2.4 times FY12 average estimated earnings and book value respectively, which is high compared to fundamentals and outlook, analysts say. Despite rally in PSU stocks in the last one year, the stock has been a major underperformer and analysts expect this to continue.