Leveraging power

SMARTSHARE

NTPC's third quarter results ending December 31, 2004 showed a 67 per cent jump in net profit. The newly-listed PSU saw PAT climbing to Rs 1,365 crore from December 2003 levels of Rs 819 crore.

This was on the back of a relatively minor 8 per cent rise in total Q3 revenues to Rs 6,270 crore from Rs 5,797 crore (7.5 per cent stripped of other income).

This was despite a Central Electricity Regulatory Commission (CERC) tariff order capping returns to 14 per cent on equity (14 per cent RoE) versus an earlier 16 per cent RoE.

Thus the improved margins appear fantastic. (NTPC's 2003-04 RoE was around 15 per cent rather than the maximum allowable 16 per cent.)

Future prospects look good at first glance. The corporation has already increased its generating capacity by 1,000 MW in this fiscal with the commissioning of a 500 MW thermal unit at Talcher and a 500 MW thermal unit at Ramagundam.

This beefs up capacity by approximately 4-5 per cent.

It hopes to add another 5,000 MW or so in new capacity before April 2005 and a total of 8,000 MW within 2005-06.

While it suffered a setback in its first attempt to go overseas when it was outbid for a Libyan contract, it will continue to look for opportunities in North Africa and the Middle East.

The earlier deal to securitise outstandings from bankrupt state electricity boards (SEBs) through the RBI did the trick in terms of collection efficiency, which rose to 99 per cent from an earlier 72 per cent.

If one adjusts for that, April-December 2004-05 revenues actually rose 34 per cent over the comparable period in 2003-04.

And, EPS rose to an annualised 5.92 from an annualised 4.52. Income and PAT in Q4 2004-05 should be even better than these results promise.

Continuing reform could result in quicker dues realisation. In addition, NTPC might just receive a windfall of Rs 1,650 crore in written off dues from the erstwhile Delhi Electric Supply Undertaking (DESU).

The stock was listed in November at Rs 75-88 after a public issue at Rs 62. It's trading around Rs 80 right now and the current P/E would be approximately 13 if we took the nine-month performance April-December 2005 as our benchmark.

That is a high discount for an utility with a capped RoE; moreover one in a sector in dire need of reform. NTPC does hand out a reasonable proportion of profits as dividend.

If it maintains its 2003-04 Dividend: PAT ratio of roughly 21 per cent, it could pay maybe Rs 1.3 per share in this current fiscal.

Worldwide, utility stocks tend to be treated as akin to bonds rather than as pure equity instruments.

They have predictable revenues and rates of return and they pay relatively high dividends. Usually the growth prospects are not particularly exciting.

None of this holds for NTPC. It is operating in a messy and unpredictable environment where political interference could warp the business.

On the other hand, it has strong growth prospects. There could be a 25-30 per cent expansion in total revenues over the next fiscal, after capacity additions.

If the power sector does maintain some reform momentum, NTPC might be a great stock to own.