If you are a conservative investor with a low-risk appetite and willing to invest for medium/long-term returns, then NTPC is a stock that you could consider.
Trading in the Rs 130-140 price band for the last few months, the stock broke out last week to touch a high of Rs 160. It has since retraced its steps marginally, and given the thumbs down from the market to the 2006-07 provisional results announced on Thursday, it could fall further in the next few trading sessions.
Investors can use this opportunity to acquire the stock, as the company's prospects appear promising in the medium-term.
The NTPC stock is not for those eyeing short-term returns but for those seeking a defensive play in a volatile market.
Efficient generator
In a sector plagued with efficiency issues, NTPC stands out for its operating efficiencies within the overall limitations of its public sector character. Its coal-based stations achieved a plant load factor (PLF is the measure of capacity utilisation) of 89.43 per cent in 2006-07; the average for the whole country is less than 80 per cent.
Of course, NTPC's PLF would drop if the performance of its gas-based stations were included. But, again, even here, the company has managed to push up the average PLF beyond 75 per cent during the last couple of quarters by sourcing gas in the spot market.
This has enabled the company to recover fixed charges unlike earlier. NTPC sourced spot market gas at prices as high as $10.5-11.5 per million British Thermal Unit (mbtu) during the third quarter to push up PLFs.
Yet, its power cost remained competitive because the quantities were low and when averaged with the much cheaper domestic gas, the overall price was still affordable compared to the cost of naphtha, the alternative fuel, at $22-25 per mbtu.
The experience will stand it in good stead in the next few months when the demand for power shoots up, giving NTPC the chance to run its gas-based stations that have traditionally been idling at low PLFs, at full throttle.
The weighted average cost of NTPC's power rose marginally to Rs 1.73 per unit but it still ranks among the cheapest in the country.
This is a big advantage under the merit order system of power despatch in terms of which the cheapest power is sourced first.
Emerging fuel balance
Coal-based stations have traditionally dominated NTPC's portfolio with a share in excess of 85 per cent of its total generation capacity; gas-based capacity makes up the balance. The downside of total reliance on thermal power came to the fore last year when soaring prices of crude oil and scarcity of natural gas forced the company to idle its gas-based stations while a looming shortage of domestic coal caused a minor scare forcing it to resort to imports.
The fuel mix will undergo a change for the better in the next couple of years when a good part of its ongoing hydel projects go on stream. Hydel stations are ideal to meet peak power demand and thermal stations to meet base demand. The 800-MW Koldam hydel project will be the first to go onstream towards end-2008 followed by two other projects in Uttaranchal adding up to 1120 MW. The company is also looking at two projects in Arunachal Pradesh that will, if implemented, add another 4,500 MW to its hydel capacity.
The mix will further change in the long-term when the company's plans to enter the nuclear generation segment turn into reality. Consultants have submitted a road map for the foray into nuclear generation.
Meanwhile, NTPC has addressed the issue of security for its most important fuel source — coal — by integrating backwards into coal mining. The first of its coal mines will commence production by the end of this calendar year and the stated aim is to have up to 25 per cent of its requirements met by captive mines in the next 10 years.
Ambitious programme for capacity-addition
The company plans to add about 22,000 MW to its capacity in the next five years, which appears a trifle ambitious if you consider that it added just over 7,000 MW in the last five years. But what lends confidence is that projects adding up to a little over 11,300 MW are already under construction and the company last year awarded contracts for a further 3,600 MW.
Importantly, NTPC's capex budget of Rs 12,792 crore for this fiscal is 63 per cent higher than last year's Rs 7,820 crore. And, again, the budget looks believable if you consider the extremely healthy cash generation in 2006-07 — the company had free cash of about Rs 12,000 crore as on December 31, 2006. Four straight years of 100 per cent realisation on its bills have clearly improved the cash flows and strengthened NTPC's finances considerably.
The company is also moving with the times by venturing into merchant power plants, which sell their power to the highest bidder and normally have no pre-allocated buyers. It has classified four of its upcoming projects — including the two Uttaranchal hydel projects — as merchant power plants. Given the 14 per cent peak power deficit and the existence of its own power trading arm, NTPC Vidyut Vyapar Nigam Ltd., the merchant power plants augur well for the company's revenue and earnings.
Provisional results
The 16 per cent increase in post-tax profits to Rs 6,726 crore and 17 per cent rise in net sales to Rs 30,638 crore during 2006-07 as per the provisional results were lower than what the market expected halting the uptrend in the stock. Any price weakness can be exploited to acquire the stock with a medium/long-term holding perspective.