Capacity addition failure haunts NTPC

In 11th Plan (fiscal 2008-2012), during which NTPC was expected to add some 22,400MW. Even if it installs 5,000MW in the year to April 2012, it will have fallen some 50% short of its target

That number is a tad less than the approximately 6,000MW it has added since fiscal 2008. In the past couple of years, the firm’s execution record has been poor. Take the 11th Plan (fiscal 2008-2012), during which NTPC was expected to add some 22,400MW. Even if it installs 5,000MW in the year to April 2012, it will have fallen some 50% short of its target.

Yet, for a company that enjoys regulated 15.5% return on equity (RoE), it is capacity addition that will make it more attractive for investors.

The delay in building new factories is roughing up its profits as well. For the quarter ended December, NTPC’s power generation grew by a measly 0.2% from a year ago. Grid problems and the parlous finances of state electricity boards, its main consumers, also meant that some of them could not take delivery of contracted power. As a result, energy units actually delivered rose 0.8%. However, revenue grew 20% from a year ago. This was due to a 23% rise in fuel costs (a pass through in the assured RoE model), due to a price hike by main supplier Coal India Ltd at the end of December 2009.

A rise in employee and other costs means that earnings before interest, tax, depreciation and amortization grew 10%. Higher taxes (moving to minimum alternate tax due to an increase in RoE) have also hit the profits and net profit grew 0.3% from a year ago. Shorn of some one-offs, such as prior period sales, the new tax norms and a change in depreciation policy, the adjusted profit after tax shows a growth of 11%, in line with estimates.

But that isn’t overly impressive. Many brokerages have cut down their earnings estimates for the next two years. That, coupled with the execution track record, has meant that investors are not very gung-ho about NTPC. For a stock that is considered a defensive bet, its returns mirror those of the Sensex since the beginning of this year. The numbers are more telling since the firm declared its results. Since then, NTPC has underperformed the benchmark index by 7.5%.