Results Analysis – Power Sector..

Declaration of results by NTPC yesterday for June’16 quarter was the last of big ticket results from Power Generation & Distribution sector. NTPC has provided a support to the sector’s performance with growth of 11% in terms of both revenue and profits. Yet, sales growth remained at barely 3% with profits decline by same rate largely due to fall in other income. Aggregate sales for the set stands at Rs 37,000 crore with net profit of Rs 4,760 crore. Excluding NTPC, the sector records a sales decline of 4% and profits decline by 14%. From that perspective, the sector’s performance is quite unusual since the private sector, in general, demonstrate more efficient operations.

The contrast in sales and profit growth is largely attributable to decline in other income which fell by 12% and increase in tax provisions which more than doubled during the quarter. Core expenditure as a percent of sales has decreased by about 2 percentage point with decline in cost of fuel. The decline in other income has had a significant impact as it accounted for nearly 30% of pre-tax profits in earlier period and its share has now come down to 23%.

The contrast between private sector and NTPC’s performance is partly explained by difference in interest cost/sales ratio. For NTPC, the ratio is less than 5% whereas for aggregate private sector, it is as high as 15%.! While interest cost would depend upon the level of debt, the ratio still shows a prudent capacity expansion plan by NTPC and efficient utilisation of capital assets. The conventional finance says that an interest/sales ratio of more than 5% in general, indicates stress in the business model of the company. Among individual companies, Jaiprakash Power Ventures and Adani Power have the worst performance with interest/sales ratio of 60% and 26% respectively.

It would be pertinent to mention the financials of NHPC, the only pure hydro power company. Company which grew by 9% in terms of sales and 12% in profits. The company operates with EBITDA margin of nearly 70% and net margin of as much as 39%..! The reason for the same is that hydel plants are highly capital intensive but have very low operational cost. This is reflected in its cost structure also with high interest and depreciation cost which together account for 34% of sales, nearly double the aggregate set.

Power sector is a low growth but steady cash flow business with a reasonable profit margin. Its net margin over last five quarter stands at about 13%. The private sector is currently going through a crisis due to unmanageable capacity expansion undertaken over last several years and severe debt overhang. This is not going to get softened soon enough and the sector would continue to witness stress for quite some time.

(Image courtesy of John Kasawa at

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