Power surge

POUND WISE

To maintain its leadership position in the power sector, PSU giant NTPC is taking all the right steps forward.

Though a long-term story, the mega power plans promise a robust growth trajectory for power generation companies.

With rising competition from private sector players, leader National Thermal Power Corporation (NTPC) is making the right moves to become a fully integrated power player.

Not only does it plan to double capacity by 2012, but is looking at alternative ways of making power to boost realisations. Analysts think the stock is a good bet for long-term investors.

NTPC boasts of a 20 per cent market in installed capacity and generates 28 per cent of electricity in the country. While its core business of engineering, construction and operation of power plants brings more than 90 per cent of revenues, consultancy services to power utilities on all aspects of power businesses chip in the rest.

Of NTPC's present generation capacity of 26,194 MW, 84 per cent is coal dominated, while the remaining 16 per cent is gas based.

In FY06, the company generated 108 billion units of electricity, 7.4 per cent higher than previous year. During the same period, the company enjoyed plant load factor of 88 per cent in its coal plants against the industry average of 73 per cent.

With an average cost of Rs 1.4 per kilowatt-hour, NTPC is the lowest cost producer as its thermal power projects are located near collieries to reduce expenses and transportation time. 
 

HIGH ENERGY Plant Load Factor (%)
Year	NTPC	Ind. Avg.
FY02	81	66
FY03	84	69
FY04	84	69
FY05	88	70
FY06	88	69

Growing big
Thanks to robust macro factors India is poised for a grand take-off, however the power sector remains a major hindrance.

At present, India has peak power deficit of 12.8 per cent and needs to add 10,000 MW capacity each year over the next decade to plug the ever increasing demand-supply gap. The mega power plans, announced in the last Budget, are likely to augur well for power generation, transmission and equipment makers.

Gauging the tremendous business scope, NTPC has chalked out major expansion and diversification plans to grab a share of the opportunity ahead.

The past couple of years have seen a spurt in the number of independent power producers and aggressive expansion plans of existing private players.

Despite rising competition, NTPC is well poised to maintain its dominant position due to its plans of doubling its generation capacity to over 51000MW by March 2012 to over 70,000 MW by 2017.

The company will add around 22,000 MW capacities during the Eleventh Plan (2008-2012) by setting up new plants, expanding existing plants and acquiring state electricity board stations.

Around 70 per cent of the additional expenditure would be financed through borrowings and the rest will be funded through internal accruals. Of the 22,000 MW, around 11,500 MW of capacity is already under various stages of construction and a total of 3,700 MW will be commissioned during FY07.

Hydro and nuclear foray
Sensing the opportunities in related power businesses and speedy pace of competition, NTPC is also diversifying into hydro and nuclear power generation.

NTPC is in talks with Nuclear Power Corporation of India to foray into nuclear power generation and plans to set up a 2,000 MW nuclear power plant by 2017.

The company is bidding for 4,000 MW coal based ultra mega projects and its expertise in operating coal based thermal power plants, low tariffs and high plant load factor will give it an edge over other bidders.

NTPC has taken up 4,500 MW hydroelectric power projects in Arunachal Pradesh and plans to set up a merchant power plant of 2,000MW of these hydro capacities to earn higher margins. Considering low generation cost of hydro power and a good demand in the short-term power market, this step too will boost the company's bottom line.

Towards being an integrated player
Fuel supply at affordable prices has become a major challenge, so NTPC is taking the backward integration route by foraying into coal mining and gas exploration.

A consortium led by NTPC has won an oil exploration block in Arunachal Pradesh and this move marks the company's first step towards procuring captive gas. The company is in talks with Nigerian government to procure relatively cheap gas supply for its domestic plants in return for offering expertise on operating power stations.

The company has been allocated eight captive coal-mining blocks; two of them are to be developed through joint ventures with Coal India.

The first of these mines at Pakhri Barwadih, north Karanpura, is under development and will commence coal production from 2008.

By the end of 2017, nearly 20 to 25 per cent of NTPC's coal requirement will be met from its own mines and it will become the second largest coal producer in India, only next to Coal India.

NTPC has also forayed into transformers and electrical works through a joint venture with Transformers and Electricals, Kerala.

As a by-product of its generation operations, NTPC produces huge quantities of ash which is ideal for use in cement, concrete and building material.

It plans to make bricks and sell it as construction material to domestic and overseas players.

The company has already despatched clean fly ash consignments to clients in the Middle East. The company is planning to set up a power equipment plant to reduce time taken to commission projects from five years to three years. 
 

STRENGTH IN NUMBERS
(Rs crore)	FY06	FY05	FY04
Net Sales	26318.60	22732.40	19145.80
Y-o-Y growth (%)	15.78	18.73	0.52
Operating Profit	9861.80	9732.10	11282.60
Y-o-Y growth (%)	1.33	-13.74	79.81
OPM (%)	37.47	42.81	58.93
Net Profit	5820.20	5807.00	5260.80
Y-o-Y growth (%)	0.23	10.38	45.83
NPM (%)	22.11	25.55	27.48

During FY06, NTPC's net sales increased by 16 per cent to Rs 26,142 crore and net profit rose marginally by 0.2 per cent to Rs 5,820 crore. However operating and net margins increased by 35 and 22 basis points, respectively.

At the current market price of Rs 128.8, the scrip trades at 18.1 times FY06 earnings. The stock is trading at 16.1 and 15.2 times its FY07 and FY08 earnings estimates.

While analysts vouch for its business model, expansion plans and the management's aggressive approach, they warn that NTPC is a long-term investment and investors should not expect substantial upsides in the short term.

Pradeepkumar Dhamdhere of Anand Rathi Securities, says, "No doubt NTPC is the best bet in the power generation sector, but considering the fixed returns in the power business, one cannot expect any miraculous growth numbers. The stock however can bring good returns for long-term investors."