NTPC: Expenses mount

Results for FY08 are satisfactory but a higher wage bill could pressure operating margins.

Provisional results for FY08 from India's biggest power generation company just about make the grade. The public sector NTPC expects to post revenues of Rs 37,005 crore, a rise of 13.5 per cent and a tad higher than the street's expectations.

The numbers have been pulled up thanks to a strong performance in the fourth quarter during which net sales have risen 21 per cent. It's the bottom line, though, that's cause for concern.

The reported numbers, without adjustments for one-off items, show only a 4 per cent growth in the profit after tax for FY08 to Rs 7,129 crore. That means the net profit for the March 2008 quarter, at Rs1,054 crore, is actually lower by about 33 per cent compared with profit posted in the March 2007 quarter.

NTPC has had to provide for wage hikes and foreign exchange variations, which has depressed the profits. If these costs are excluded, the growth in profits for FY08 is a reasonable 12.8 per cent at Rs 7,406 crore.

That's what the street appears to have done because the NTPC stock fell less than a per cent to close at Rs 186 on Thursday. That is fair to some extent because some of the adjustments are for one-off items.

However, since wages are a recurring cost, they need to be included in the expenditure. In that case, the profit numbers for the power generator, are just about satisfactory.

Moreover, a higher wage bill could pressure operating margins in FY09, unless the turnover rises sharply or other expenses are curtailed. In the first nine months of FY 08, NTPC's wage bill was about Rs 1,499 crore, a rise of 84 per cent y-o-y and for FY08 the tab could be about Rs 2000 crore levels.

Thus the operating margin of 22.7 per cent, based on unadjusted numbers, for the first nine months of FY08, could fall in FY09. Since the start of 2008, the stock has underperformed the Sensex.

Pfizer Q1FY08: No signs of recovery

Multinational pharma firm Pfizer, a 40 per cent subsidiary of Pfizer Inc had ended FY08 with some disappointing numbers and the story continues into the current year.

The sale of some consumer brands (which happened late last yea) has pulled down Pfizer's top line by 3.8 per cent to Rs 154 crore in the March 2008 quarter.

Even adjusting for the sale, the pharmaceutical business has grown just 2 per cent with two big brands Corex and Becosules "" estimated to be contributing about 30 per cent of pharma revenues ""faring poorly.

Even though the animal healthcare segment grew 19 per cent, it wasn't adequate to prevent a fall in operating margins of over 200 basis points to 24.5 per cent.

Over the longer term, the Rs 694 crore Pfizer, with a strong R&D pipeline, is well positioned to cash in on the new patent regime in the country.

While the turnover may remain flat in FY08 as a result of the sale of brands, the company should manage to post a double digit growth after that.

However, Pfizer Inc has a 100 per cent subsidiary in India and therefore, it is not clear which company the parent will use to introduce new products.

There is always the risk that new launches of drugs will happen through the unlisted subsidiary, in which shareholders of the listed entity will lose out.

Pfizer's cash balances of around Rs 600-700 crore are high and the company could use this to reward shareholders through a one time dividend or even a share buy back. It could also use the money to pick up brands though brands are not coming cheap.

There is also a possibility that the money could be spent on premises for a new office. At the current price of Rs 675, the stock trades at just over 14 times estimated FY08 earnings and could underperform until some drugs from the parent's portfolio are launched in India.