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									National Thermal Power Corporation (NTPC)                          CMP: 179.85

    Q3FY12 Result Update                                                                                         February 10, 2012

NTPC’s principal business is generation and sale of bulk power. Other business includes providing consultancy, project management
and supervision, oil and gas exploration and coal mining. The leading power generator with “MAHARATNA” status has an installed
capacity of ~35 GW generating ~31% of electricity in India. It has fifteen coal-based plants, seven gas-based plants and 4 joint venture
projects.

NTPC came out with Q3FY2 results. For the third quarter ended December 2011, Net Sales grew 14.2% y-o-y and almost stable
sequentially to Rs 15,332.3 cr. Operationally, performance was weak on plant availability factor (PAF) front which has gone down to
85.3% compared to ~90% levels maintained by the company, due to coal shortages. Plant load factor (PLF) sequentially has improved
to 83.6%. Fuel costs have gone up significantly which has impacted operating margins of the company which fell to 18.9% in Q3FY12
from 27.2% in Q3FY11 and 22.7% in Q2FY12. PAT showed a de-growth of 10.2% y-o-y and 12.1% q-o-q to Rs 2,130.4 cr. Against the
planned capacity addition of 4,320 MW in FY12, so far for 9MFY12, only 1,660 MW has been added.

Key Highlights of the Results
Particulars (Rs in cr)                   Q3FY12       Q3FY11      % chg     Q2FY12       % chg     9MFY12       9MFY11           % chg
Net Sales                                 15332.3     13421.3      14.2%    15377.5      -0.3%     44881.3      39355.1          14.0%
Other operating income                       51.1        15.0     240.1%     321.26     -84.1%       369.9         48.7         658.8%
Depr w/back & AAD                             1.0        75.2         NA          0         NA         1.0       1838.6             NA
Other Income                                861.0       653.8      31.7%      688.1      25.1%      2548.0       1815.0          40.4%
Total Income                              16245.4     14165.3      14.7%    16386.9      -0.9%     47800.2      43057.4          11.0%
Total Expenditure                         12476.9      9831.5      26.9%    12138.6       2.8%     35920.8      31411.4          14.4%
Fuel Cost                                 10793.3      8338.6      29.4%    10649.4       1.4%     31192.5      25648.2          21.6%
Employee Cost                               718.8       688.5       4.4%      784.6      -8.4%      2194.2       2081.5           5.4%
Other expenses                              916.2       798.9      14.7%      704.6      30.0%      2485.6       2413.5           3.0%
Provisions                                   48.6         5.3     801.5%        0.0                   48.6       1268.2         -96.2%
EBDITA                                     3768.5      4333.9     -13.0%     4248.2     -11.3%     11879.3      11646.0           2.0%
Depreciation                                756.0       598.5      26.3%      658.2      14.8%      2055.4       1787.6          15.0%
EBIT                                       3012.5      3735.3     -19.4%     3590.0     -16.1%      9823.9       9858.5          -0.4%
Interest                                    449.6       324.7      38.5%      331.1      35.8%      1155.1       1065.6           8.4%
PBT                                        2562.8      3410.6     -24.9%     3258.8     -21.4%      8668.8       8792.9          -1.4%
Tax                                         432.4      1039.2     -58.4%      834.6     -48.2%      2038.5       2472.1         -17.5%
PAT                                        2130.4      2371.5     -10.2%     2424.1     -12.1%      6630.3       6320.9           4.9%
Equity                                     8245.5      8245.5                8245.5                 8245.5       8245.5
Face Value                                     10          10                    10                     10           10
EPS                                           2.6         2.9                   2.9                    8.0          7.7
OPM%                                       18.9%       27.2%                 22.7%                  20.6%        23.8%
NPM %                                      13.1%       16.7%                 14.8%                  13.9%        14.7%
Tax %                                      16.9%       30.5%                 25.6%                  23.5%        28.1%
EBITDA %                                   23.2%       30.6%                 25.9%                  24.9%        27.0%
                                                                                                                (Source: Company, HDFC Sec)

•      NTPC reported net sales of Rs 15,332.3 cr in Q3FY12, up 14.2% y-o-y and flattish q-o-q. Sales for the quarter include Rs 155.5 cr
       pertaining to previous years (Rs 159.8 cr in Q3FY11). Further, sales include Rs 407.2 cr on account of income tax recoverable
       from customers. Gross generation has gone up by 5% y-o-y and 10.8% q-o-q to 56.4 bn units as coal supplies returned to normal
       with Telangana issue getting resolved. Gross generation has gone up after four quarters. ESO (Energy sent out) has gone up 2.6%
       y-o-y and 12.2% q-o-q to 52.6 bn units. Realizations are up 11.4% y-o-y to Rs 2.9 per unit and down 11.2% q-o-q.

Particulars (bn units)                                  Q3FY12             Q3FY11            % chg           Q2FY12               % chg
Gross generation                                           56.4               53.7            5.0%              50.9              10.8%
ESO                                                        52.6               51.3            2.6%              46.9              12.2%
Price per unit based on ESO                                 2.9                2.6           11.4%               3.3             -11.2%
                                                                                                                (Source: Company, HDFC Sec)

•      Other operating income was up from Rs 15 cr in Q2FY11 to Rs 51.1 cr in Q3FY12. Other income was up 31.7% y-o-y and 25.1%
       q-o-q to Rs 861 cr.

•   During the quarter, PLF of the company was lower for coal based stations over corresponding period last year though up
    sequentially. These operated at 83.6% PLF compared to 78.4% in Q2FY12 and 87.2% in Q3FY11. On the other hand, PLF of gas
    based stations improved to 70.5% in Q3FY12 compared to 60.8% in Q2FY2 and 66.3% in Q3FY11.
PLF                                  Q3FY12     Q2FY12     Q1FY12     Q1FY11     Q4FY11    Q3FY11        FY11        FY10
Coal                                        83.6        78.4        86.9        89.5        93.6         87.2          88.3        90.8
Gas                                         70.5        60.8         62         80.5        72.4         66.3          71.8        78.4
                                                                                                                (Source: Company, HDFC Sec)



Retail Research                                                                                                                      1
•   PAF in Q3FY12 was lower at 85.3% (vs 93.6% in Q3FY11) due to lower coal supplies; this has been usually maintained at ~90%
    levels by the company so far. Also, coal linkages for new plants by CIL is lower at 50% compared to 90% for the existing plants
    which means capacity utilization will not be at optimum level. Farakka, Kahalgaon and Talcher suffered lower generation on
    account of coal shortages. In Talcher, the problem was further aggravated by local Law & order issue.

•   Operating margins have come down significantly from 27.2% in Q3FY11 and 22.7% in Q2FY12 to 18.9% in Q3FY12. The adverse
    impact came in mainly on account of increase in fuel costs which have gone up to 70.2% as percentage cost to sales compared to
    61.7% in Q3FY11 and 67.8% in Q2FY12. Fuel cost has gone upto Rs1.9/kWh in 9MFY12 from Rs1.6/kWh in 9mFY11. In recent
    tenders for imported coal prices are down by 20-25% which will lead to higher blending of the same. Employee costs have been
    almost stable.

•   Interest costs have gone up 38.5% y-o-y and 35.8% q-o-q to Rs 449.6 cr. Depreciation costs have gone up 26.3% y-o-y and 14.8%
    q-o-q with higher capex being undertaken by the company on setting up of new plants in FY11 & FY12. PBT has declined 24.9%
    y-o-y and 21.4% q-o-q to Rs 2,562.8 cr. Lower tax rate at 16.9% in Q3FY12 compared to 30.5% in Q3FY11 and 25.6% in Q2FY12.
    resulted in slightly cushioning deteriorating operating margins. PAT was lower just by 10.2% y-o-y and 12.1% q-o-q to Rs 2,130.4
    cr as a result of lower effective tax rate.

•   Debtor days have gone up from 66 days in Q2FY12 to 77 days in Q3FY12 (in Q3FY11 it was 45 days). SEBs are not able to off-
    take power even while peak and energy deficits are up due to poor financial health. States which were earlier availing discounts
    have stopped doing so and are making payments at the end of 60 days. NTPC has to offer its customers a 2% rebate when an
    immediate payment is made upon presenting the bill and a discount of 1% if the payment is made within a month of the bill
    submission, as regulated by CERC. In addition, NTPC also offers graded discounts if the payment is made within the time period of
    30 days. It does not offer any discount after 30 days.

•   For 9MFY12, NTPC reported 14% increase in Net Sales to Rs 44,881.3 cr while growth in PAT was just 4.9% to Rs 6,630.3 cr.
    Earnings were impacted on lower operating margins of 20.6% in 9MFY12 compared to 23.8% in 9MFY11 which were on account
    of higher fuel costs. Interest and Depreciation costs have gone up 8.4% and 15% respectively to Rs 1,155.1 cr and Rs 2,055.4 cr
    respectively.

Other Key takeaways
Coal blocks to be reallocated back to NTPC
The coal ministry is set to restore the five captive coal block allotments cancelled earlier in May 2011. This move should boost the in-
house coal production to 47 mill tonnes per annum, one fourth of NTPC’s coal requirement over the next five years which would aid to
double its generation capacity to 75,000 MW. The decision has been prompted by a mix of factors including an urgent need to bridge
the burgeoning gap in coal demand and supply, firm commitment of rapid development of the blocks from NTPC, the huge investments
already made by the company on power projects linked to the blocks, pressure from the power ministry for restoring the blocks and the
recent coal supply crisis. Earlier in May 2011, the ministry had de-allocated five coal blocks –Chatti Bariatu, Chhati Bariatu (South),
Kerandari, Brahmini and Chichro Pastimal on grounds of delays. The first three blocks are meant to supply fuel to two power plants of
1,320 Mw capacity each — Barh in Bihar and Tanda stage II in Uttar Pradesh. Both the projects, when commissioned, would require
over 10 mn tonnes of coal annually. The other two blocks are meant to feed the expansion of Kahalgaon power project in Bihar and
Farakka in West Bengal. NTPC has so far spent more than Rs 7 bn on these coal blocks.

MOU with Kerala Govt to develop wind-energy projects - NTPC has signed an MOU with Government of Kerala, with the objective
to plan and develop around 200 MW wind energy-based power projects in the state of Kerala on a BOO basis. Out of a total 200 MW,
first 80MW wind energy projects will be developed on fast-track basis at Ramakkalmadu by NTPC.

Capacity addition –So far as capacity addition in FY12 is concerned, NTPC has a plan of adding 4320 MW consisting of 1320 MW at
Sipat, 500 MW each at Simhadri and Mauda and 1000 MW each at Vallur and Jhajjar. With only 1,660MW added in 9MFY12, the
management may miss the target. For FY13, NPTC is planning a capacity addition of 4GW.

FY12 Capital expenditure Targets – At the beginning of FY12, NTPC had earmarked capex of ~Rs26,400 cr at standalone level
comprising capex on ongoing projects (Rs14,000 cr), completed projects (Rs1,200 cr), new projects (Rs7,000 cr, representing
advances towards BTG and other packages award), mining (Rs 900 cr) and equity investment in JV projects (Rs1,700 cr). This has
been revised to Rs 17,400 cr given the delays in BTG segment. So far in 9MFY12, NTPC has done a capex of Rs 9,200 cr.

On BTG award front, management expect Supreme Court final order to come out by mid-February and could then award the 11 sets of
660MW (5.4GW for NTPC 9 sets) over next 2-3 months. Similarly, NTPC is in the process to invite tender for BTG of 3x800MW Kudgi
and this along with other supercritical units could mean at least 8GW of order award over next 6-9 months. These awards are critical
and successful project awards will improve visibility for 12th Plan capacity addition targets at ~25GW.

Higher coal imports in FY12 - To meet its FY12 requirement of 162 mn tons for achieving its targeted generation of 235BU. NTPC
plans to import 15.4 mn tonnes of coal. Coal imports in Q3FY12 stood at 2.6mt, up by 26.9% y-o-y. For 9MFY12, it stood at 9.9mt, up
by 20.2% y-o-y. NTPC can blend upto 20% of imported coal. However, during FY11 the blending was at 7.8%. Management indicated
that its cost of generation will be higher by 30-40p/unit for 10% blending. The balance of coal supplies will be sourced domestically from


Retail Research                                                                                                                     2
Coal India and its subsidiaries which are facing production bottlenecks at present. With rollback of hike in coal prices by Coal India,
NTPC has saved an outgo of ~Rs 7,000 cr (which would otherwise have resulted in increase of ~40% increase in fuel costs across its
plants).

Concerns
Fuel related - NTPC's operations depend on timely availability of fuel. If coal supplies do not grow in line with capacity additions then it
could affect the PLF of the coal-based plants. Also, transportation bottlenecks could adversely impact the availability of coal. Coal
shortages could worsen going forward affecting supplies for new plants. This could impact NTPC’s plant availability factor (PAF) based
gains going forward.

Technology - NTPC is implementing larger modules and newer technologies such as 660 MW and 800 MW super critical technology
and alternative fuels such as gas and hydro more aggressively, which could place demands on its project management and technology
absorption skills.

Project execution - Delays in commissioning of new capacities remains a key concern as growth in its profits is dependent on
increasing capacities.

Lower demand of power and financial health of the SEBs – For the past few quarters, demand of power from SEBs has been lower
– first attributed to hydropower generation and then to lower demand. The financial health of SEBs and demand for power are crucial
given the power capex cycle in the country. Any decline in either of these could be detrimental for the power sector

Conclusion
NTPC is a leader in the power generation segment contributing nearly 31% to India’s electricity generation. Its regulated business
model offers a favorable risk reward vis-à-vis private IPPs who face the risk of significant RoE compression. However, NTPC has
performed below market expectations over the past year. The main areas of concern include timely supply of equipment, execution of
capex plans and availability of fuel.

Increase in debtor days in Q3FY12 to 77 days is further indication of the worsening financial health of SEBs which could impact NTPC’s
performance in the coming quarters. Management expects some tariff revision by SEBs that could improve their health.

In FY12, NTPC had planned of adding 4320 MW consisting of 1320 MW at Sipat, 500 MW each at Simhadri and Mauda and 1000 MW
each at Vallur and Jhajjar. With only 1660MW added in 9MFY12, the management may miss the target. For FY13, NPTC is planning a
capacity addition of 4GW. Also, till date, NTPC has not won a single UMPP based on competitive bidding. This is a cause of concern as
the power sector gradually shifts platform to a more open bidding system. The management indicated that it is implementing systems
and processes to enable it to operate effectively in an era when competitive bidding for projects will be the norm.

The recent decision by Ministry of Coal to reallocate the previously cancelled coal blocks comes as a breather for the company and
strengthens its position in boosting up of its capacity. The captive coal blocks would meet almost 20% of the company’s coal
requirements. This provides some relief on the fuel availability risk. Also, the rollback of hike in coal prices by Coal India has provided
NTPC with some temporary relief and saved ~Rs 7000 cr of NTPC. However we may have to relook at this in Q4FY12 as Coal India
may look to revise its coal prices again in the new fiscal.

Stagnant power generation and failure to meet capacity addition target are concerns reflected from Q3FY12 results. Deteriorating
financial health of the SEBs remains a major concern for the sector itself. The near-term outlook for the company remains subdued.
PAF declined during the quarter due to lower availability of coal. While faster commissioning of newer projects could boost revenues
and profits, the progress on this count is limited. Given this scenario, there is skepticism whether NTPC would achieve its capacity
addition plan for FY12.

NTPC is currently trading at about 1.9x its FY13 (E) BV of Rs 93.5. Historically, NTPC has traded at a premium to its peers due to
stable cash flow, the regulated model that enables it to pass on fuel costs and interest rate, strong balance sheet, and strong
parentage. However, this premium seems to have narrowed in light of NTPC’s track record of capacity addition and recently observed
lower PLFs. Although NTPC’s operating cash flows and investments would be sufficient to fund its capex plans, the strong balance
sheet does not necessarily translate into speedy completion of projects. With a drop in PLF and PAF, effective increase in sale
price/unit could be muted in FY12. We revise our FY12 estimates given the looming fuel crisis and stressed situation of SEBs
eventually affecting offtake of the company and also higher fuel costs which is likely to affect
the company’s performance in FY12. FY13 performance is also likely to get impacted owing to these reasons unless some bold
initiatives come through from the government for the power sector which may however take some time to take effect.

In our result update Q2FY12 dated November 02, 2011 we had stated that NTPC could trade in the Rs 169 to Rs 192 band. Following
the issue of report, the stock made a low of Rs 152 on 23 November 2011 and a high of Rs 181.8 on 4 November 2011. NTPC will
continue to trade at a premium to other IPPs who face higher risk, though in terms of P/BV, it is expensive compared to its Asian peers.

We expect the stock to trade in the band of Rs 156 –Rs 186 (13x-15.5x FY13E EPS and (1.7x-2x FY13E BV) for the next quarter.




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Financial Performance

Particulars                                      FY09               FY10               FY11           FY12(OE)            FY12(RE)             FY13(E)
Total Income                                   45272.8            49230.1            59247.8           65848.8             66300.2             73593.2
EBDITA                                         13746.9            15344.5            16684.4           16989.0             16243.5             17735.9
EBITDA (%)                                      30.4%              31.2%              28.2%              25.8%               24.5%              24.1%
PAT                                             8201.3             8728.2             9102.6            9849.8              9149.4              9861.5
PATM(%)                                         18.1%              17.7%              15.4%              15.0%               13.8%              13.4%
EPS                                                9.9               10.6               11.0               11.9                11.1               12.0
Equity                                          8245.5             8245.5             8245.5            8245.5              8245.5              8245.5
P/E                                               18.1               17.0               16.3               15.1                16.2               15.0
                                                                                                              (Source: Company, HDFC Sec)




Analyst: Siji A. Philip – Capital Goods, Power & Mid-Caps
Email: (siji.philip@hdfcsec.com)


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Retail Research                                                                                                                                     4

								
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