NTPC Q4 Net Jumps 24% on Accounting Change

ENOUGH STEAM LEFT

State-run NTPC on Wednesday reported a 24% rise in its March quarter net profit, and said it would double capital expenditure in the current fiscal to boost generation capacity.
The power utility plans to double capital expenditure in the current fiscal to . 26,400 crore to add 4,320 mw generation capacity, chairman and managing director Arup Roy Choudhury told reporters here.
"The capital expenditure for the current financial year would be financed in the ratio 70:30. The equity portion would be met through internal accruals. We have an unutilised debt of . 20,540 crore. We would raise $500 million through euro bonds in May-June this year," Choudhury said.
The utility also plans to borrow from domestic banks and the Life Insurance Corporation of India.
NTPC's March quarter net profit provisionally rose 24% to . 2,505 crore from . 2,018 crore in the previous year. Provisional net sales for the quarter stood at . 14,488 crore, up 17.74% from the yearago period.
"The abnormal rise in profit in Q4 is mainly due to the change in accounting procedure," Choudhury said.
However, provisional net profit for 2010-11 was up only 1.12% at . 8,866 crore. Provisional net sales for the period rose 16.36% to . 53,721 crore, from . 46,169 crore in 2009-10.
"State electricity boards did not draw power though it was made available by us. This lack of demand led to lower electricity generation," director, finance, AK Singhal said.
NTPC, which is scouting for coal assets in Australia, Indonesia, South Africa and Mozambique, has a generation capacity of 34,194 mw. It is executing 15 power projects with a total capacity of 14,748 mw.
The utility spent . 12,818 crore for the 2,490 mw capacity added in the year ended March 2011.
The company estimates total coal requirement for 2011-12 will be about 162 million tonnes, of which 14 million tonnes may have to be imported. It has signed an agreement with State Trading Corp for 12 million tonnes and will import the remaining on its own. NTPC is also looking at executing projects in neighbouring countries Bangladesh, Sri Lanka and Bhutan.

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Pick right sectors, get an inflation-proof portfolio

STOCK MARKET

While several companies within the FMCG sector can offer a good hedge against inflation, ITC is the prime choice given its growing product category and unlimited pricing power,

    There is no macro-economic theory in the investing world that looks favourably at inflation, especially when it creeps up beyond sane levels. It isn't just the stock market crowd; inflation is seen with diffidence, anger and unbridled fear across all sections of society—by the rich, the poor, by businessmen, politicians, bureaucrats and even criminals. Yet, modern civilisation hasn't found an appropriate remedy for this malaise, which is as old as the money whose value it directly deflates. 
    Meanwhile, after almost a decade of nearly benign behaviour, inflation has kicked in with a vengeance on the Indian economic (and investing) scene, impoverishing all holders of financial assets in real terms at an alarming rate. It might, therefore, help to inflationproof your portfolio by identifying sectors that can withstand the ill-effects of inflation in a better manner and by tilting your allocation towards such sectors. 
    But first, the disclaimer: there is no such thing as a perfectly inflation-proof sector to invest in. If broad prices rise, the factor inputs (costs) for any product or service sold by a business will rise. Businesses will, in turn, attempt to pass on this cost increase to customers, hitting demand and, therefore, the profit prospects. This is what drags down the stock prices. 
    As might be expected, the effect of inflation on stocks is felt differently across various sectors. One such sector is FMCG. The conventional, and oversimplified, view on FMCG is that these businesses have a strong pricing power and will be able to pass on the increase in raw material price to customers, courtesy the brand and product loyalty that they command. In India, many FMCG product categories have relatively low penetration levels where increased brand building and distribution are likely to drive volumes despite price hikes. 
    This theory is supported by the demographic dividend of the relatively young Indian population pyramid. As more Indians (in absolute as well as percentage terms) enter the earning age, and as employment and income opportunities expand for them, their FMCG appetite is increasing fast enough for businesses with successful products to pass on the price hikes. This, despite the increasing competition and cost of increased promotional spends. 
    Even within the FMCG pack, there are 
    strong differences on how 
    inflation can be passed on to 
    consumers and how strongly 
    demand stands up in the face of 
    monthly price rise. Again, this is a 
    function of category and brand strength. Categories such as soaps, detergents, biscuits, edible/hair oils, where product positioning and differentiation is relatively weak, will suffer the ill-effects of inflation the most. Thus, the revenues of companies like HUL, Britannia, Marico and Godrej Consumer are partially hit every time there is a spurt in the prices of their key raw materials, such as crude palmolein oil (CPO), petrochemicals (used for detergents), copra and edible oil. 
    On the other hand, these companies have other strong FMCG categories, where gross margins are much higher, and where their brands and product differentiation afford them more scope to mark up their prices every time the raw material costs go up. HUL's personal product portfolio, Godrej Consumer's hair colour range and Nestle's coffee are good examples of categories where protection from inflation is much stronger. In fact, niche players in apparently weaker categories are often able to protect their margins. I doubt if people would easily switch from Emami's cool hair oil (Navratna), but then, it's a much smaller category than a normal hair oil. Win some, lose some. What if you could find an FMCG company with a large and growing product category, which is a dominant player and enjoys unlimited pricing power? Obviously, it would be the FMCG stock to own in inflationary, or even at other, times. It's not too difficult to guess that I'm referring to ITC. They've tried everything with ITC —blocked advertising, restricted surrogate promotions, banned smoking in public places, campaigns against smoking, reckless playing around with excise rates and controls—but to no avail. ITC practically owns the cigarette market with a quasimonopolistic grip like no other player in any category. Driven by the same factors that push the other FMCG categories—Indian income, demographic and consumption—ITC is poised to deliver a volume growth that should surprise investors over the next few years. 
    If this was not enough, the cash that the cigarette business is spewing is being reinvested in futuristic businesses that are increasingly moving towards break-even levels or are delivering growing profits: food, lifestyle products, hotels and paperboard. No wonder, ITC's market cap is the highest among all consumer stocks, a staggering 1.4 lakh crore. The stock trades at almost 24 times the 2011-12 estimated earnings and looks good for a couple of decades. If you want to fight inflation, this is the stock for you.

The author is Vice-president, Institutional Equities, Edelweiss Securities. The views expressed here are personal.