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Stock Insight: Charged Up

Growth in power demand, entry in areas like hydropower to energise NTPC's growth

NTPC is the largest thermal power generating company in India, accounting for nearly 20 per cent of the installed capacity in the country. NTPC's core business is engineering, construction and operation of power generating plants and also providing consultancy to power utilities in India and abroad. Over the last three decades, it has built a strong portfolio of coal and gas/liquid fuel based generation capacities. As of December 2006, NTPC had an installed capacity of 26,194 MW, about 82 per cent of which comes from its 14 coal-fired plants and 18 per cent from seven gas-based plants. Read on to find out what makes a compelling case for this dominant player of the power sector.

Demand Outstrips Supply
The power industry in India is characterised by energy shortages. In FY06, demand for electricity exceeded supply by about 8.3 per cent and 12.3 per cent during base load and peak load requirements, respectively.

In recent years, however, the government has taken measures to restructure the industry and attract investment. The government has also unveiled an ambitious target of providing 'Power for All' during the 10th and 11th Five-Year plans. Based on the 16th Electricity Power Survey prepared by the Central Electricity Authority (CEA), India will require an additional capacity of nearly 100,000 MW by 2012 to achieve this goal. NTPC looks well poised to benefit out of these initiatives.

Massive Expansion Plans
The company has plans to scale up its power generation capacity by an additional 21,941 MW during the 11th Five-Year plan (2007-11), and further to 66,000 MW by 2017. It is also foraying into hydro power and has already commenced work on its first hydro power station which is expected to become operational by financial year 2009.

Backward Integration
The company has opted for backward integration in order to secure fuel supplies for its capacity addition programme. It has recently diversified into coal mining to emerge as an integrated power major. The company is also in the process of acquiring coal mines abroad, and expects to meet nearly 20-25 per cent of its coal requirements from the captive mines. During FY 2006, the government allotted eight coal blocks, with estimated reserves of 4.77 billion tonnes and annual production capacity of 58 million tonnes, to NTPC. It is going to start coal production by April 2008. This will ensure better control, greater reliability and lower cost of coal supply.

Proximity to Fuel Sources
Most of NTPC's coal-fired stations are located close to the coal mines. It helps to reduce supply interruptions and transportation costs. Also, its gas-fired stations are located along major gas pipelines. We believe the proximity to primary fuel sources is one of the key factors enabling it to generate electricity at rates which are among the most competitive in India. NTPC has entered into long-term coal and gas supply agreements with fuel suppliers. To ensure reliable supply of gas for its capacity addition at Kawas and Gandhar, the company is in the process of finalising long-term contracts for sourcing gas. We believe these initiatives will give greater fuel security and control over fuel expenses, and therefore, enhance competitiveness.

High Operational Efficiency
NTPC operates at a high plant load factor (PLF), which basically means high capacity utilisation. For example, in FY 2006, its average PLF was 87.54 per cent. This compares favourably to the all-India average PLF for coal-fired plants of 72.7 per cent during the same period. The company's monitoring and maintenance techniques offer it a competitive advantage in an industry where reliability and maintenance costs are a significant determinant of profitability.

Diversification
While taking proactive steps to grow its core business of power generation, NTPC is also diversifying into related activities to create new avenues for revenue and margin growth.

Firstly, it has plans to strengthen its position in power trading, a segment which has a lot of potential due to the regional imbalances in availability of power. NTPC is already engaged in power trading through its subsidiary, NTPC Vidyut Vyapar Nigam Ltd (NVVNL). In FY 2004, its first full-year of operation, NVVNL traded 962 million units of electricity and generated revenues and profits after tax of Rs 224 crore and Rs 2.15 crore respectively. Secondly, consultancy is another business segment that NTPC is targeting. It plans to leverage its experience in the power sector to expand consultancy operations, both in India and abroad. In FY 2006, this division had total revenues of Rs 4.52 crore.

Conclusion
As a result of the initiatives that are being taken, NTPC's sales are expected to grow at a CAGR of 11.33 per cent during FY 2006-2009 to cross Rs 36,000-crore mark. The net profits are also expected to grow at a robust rate of over 20.5 per cent to cross Rs 10,000 crore by FY 2008.

The key concern, however, arises from regulatory aspects, which can adversely impact the company's future cash flows. The CERC has issued new tariff regulations for the period from April 1, 2004 to March 31, 2009. Under the regulations, the post-tax rate of return on equity has been reduced to 14 per cent from 16 per cent, which was allowed until March 31, 2004.