NTPC: Top Dividend Stock to Invest
National Thermal Power Corporation (NTPC) is a Public Sector Navratna Company, with Government of India having majority stake. NTPC is a power utility company that has business interests in thermal power generation industry. It is engaged into engineering, construction, and operation of power plants.
Trend Analysis
The whole reason for any business to exist is to generate sales revenue and make more profits. At a minimum, the parameters listed below should have continuously increasing trends. All the data below is based on last 8 years 2000 to 2008. Trend charts are shown in image below.
- Revenue: Increasing trend with average growth of 11.5%.
- Earnings per share: Increasing trend with average growth of 10.3%.
- Net cash flow from operations: The net cash flow from operations has an overall increasing trend. In general, the net cash flow is equal to or greater than reported net profit. This shows that corporation is able generating sufficient cash to have sustainable net profit.
- Profit/Loss from operations: Looking at standalone profit only, the corporation is showing consistently increasing profits from its operations.
- Reported net profit: Increasing trend
- Gross margins: Sustainable gross margin, averaging 22.2% (with narrow standard deviation of 3.55%). This is very good.
- Operating margins: Sustainable operating margin, averaging 30.1% (2.03% std. dev.). This is very good.
NTPC Trend Analysis
Quality of Dividends
In this part of my analysis, I am trying to understand dividend growth rate, consistency, and ability of the corporation to demonstrate sustainability. In is also an indirect way to gauging management’s policy vis-à-vis sharing the profits with common shareholders.
- Dividend per share: Chart 3 shows the dividends consistently increasing trend of dividends.
- Payout factor: This is ratio of dividends per share dividend by EPS. NTPC has been consistently maintaining dividends less than 50%. This is good because, the corporation can use profits for further capital investments. This shows that corporation is sharing the proportional profits with common shareholders.
- Dividend growth rate: The rate of dividend growth is highly variable. The rate of growth has been 53% (2004), 73% (2005), 17% (2006), 14% (2007), and 9% (2008). Ideally, I would like to see a consistent growth rate. However, since this growth is always positive and above level of inflation, I would consider this acceptable.
- Ratio of cash from operations to reported net profit: In general, this ratio is more than one. This is very good.
- Ratio of profits from operations to reported net profit: In general, this ratio is more than one. This is very good.
- Ratio of Cash from operations to total debt: This ratio is consistently less than one. What this means is – in any given year, the corporation’s total debt is always higher than the amount of cash generated. Any reduction in yearly cash flow will affect how the corporation services its debt. However, since this debt level is consistently at a similar level, it demonstrates that it is being managed effectively, and perhaps sustainable.
Dividend Cash Flow vs. Risk Free Savings Cash Flow:
Why should I take risk if I can get a same or more cash flow by putting my capital into any risk free savings, fixed deposits, or any such risk free accounts? Therefore, I try to understand how dividends will affect my cash flow in 10 years of time period. The baseline assumptions are (1) the stock’s dividend yield is 1.9% at current price of Rs. 183; and (2) savings interest rate is 7%.
- Best case scenario: considering average dividend growth rate of 33% for last five years, the dividend cash flow will be 1.92 times the cash flow from savings interest.
- Worst case scenario: considering low end of the dividend growth of 8% for last five years, the dividend cash follow will be only 0.30 times the cash flow from savings interest.
- In order to have equal cash flow (i.e. dividends = savings interest) in 10 years time period, the current yield should be 3.1% with worst case dividend growth of 8%. At this yield the buy price is Rs. 112.
Beta-based expected return:
I measured Beta of NTPC stock’s risk (or price movement) relative to the S&P CNX NIFTY (or index movement). Here, I am trying to understand how a stock price behaves relative to the market and how to factor in the capital appreciation into my expected returns.
- The stocks four year Beta value is 0.67 (0.77). This means NTPC’s stock is relatively less volatile w.r.t. S&P CNX NIFTY index.
- The expected return is 12.7% (13.5%). Expected return = [risk free return, 7.0%] + Beta, 0.77 x [expected market return, 15.5% – risk free return, 7.0%]. I will provide more details on this calculation in future post. So stay tuned!
- Now factoring in 12.7% (13.5%) of expected return into the worst case dividend growth of 8% and current yield of 1.9%, the total cash flow is 3.19 (3.7) times the savings interest rate.
Fair Value Calculation
Based on the analysis so far, I believe NTPC will be a good long term investment. The next step is to estimate the fair value and understand risk return characteristics to make an investment.
- NPV price based on 15 year DCF: Rs. 110.5
- Average high yield price calculated based on past 8 years: Rs. 133.9
- Pricing relative to 8 year average PE ratio: Rs. 137.3
- Pricing based on PE ratio of 12: Rs. 97.5
- Graham number: Rs. 108.0
The range of fair value is calculated as Rs. 100.10 to Rs. 134.8. This is determined by taking average of above five parameters and using one standard deviation for high and low values.
Qualitative Analysis
NTPC is a well managed corporation in a very challenging power generation industry. In this industry new projects take 3-5 years in development which require sustainable execution and planning for break even and profitability. It also has a long term roadmap to more than double its generation capacity. I expect this to bring in increased revenue, increased cash, and potentially increased capital appreciation.
NTPC has had good financial performance in past and excellent present state of its business. In addition, it has sustainable financial operations, sustainable profitability, and sustainable cash flow.
Summary…
The analysis shows that NTPC is an excellent investment for long term (10+ years) dividend based cash flow and capital appreciation.
- Initiating a position at current pricing of Rs 183.75 provides a total expected return of 3.19 (3.7) times the saving interest cash flow.
- Waiting for initiating a position at Rs. 134, the total expected return would be 4.82 (5.22) times the savings interest cash flow.
Looking at the long term prospects of the company, I individual investors can initiate a starter position at this pricing. If pricing falls into the fair value range, the investor can add to this starter position. I will continue to add to my position as my allocation levels allows.
Full disclosure: Long on NTPC.
Please Note: April 16, 2009, One of the readers, Silambu Chelvan identified an error in my calculation. While the explain is correct, there was an error in my excel formula. I have now corrected this error in my calculation. The beta-based expected return is 12.7% (and not 13.5%). To make it more legible, I have included old values and indicated it as crossed line. After correcting this error, my conclusion about NTPC still remains same.
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This is really an wonderful analysis and a very good example for newbies like me to start with. Could you guide me where to find those information (like revenues etc)? Also could you clarify what the terms NPV and DCF are?
Silambu,
No single place has all information in one place. In order of preference, I use moneyvidya.com (for company info, charts, info on market sentiment, opinions, qualitative analysis), Rediff Moneywiz (for capital structure, profitability, dividends), moneycontrol (for balance sheet, P/L, cash flow, few other parameters), NSE (for historical pricing, NIFTY index data). After I collect this together in excel sheet, I do my own calculations for trends, quality of dividends, Beta, DCF, etc.,
I do plan on discussing each section in little more details (including NPV and DCF). NPV – net present value; DCF – discounted cash flow. First, I will post few stock analysis so that I can use them as real world examples to demonstrate the calculations (and not use hypothetical scenarios). So stay tuned!
Best Wishes,
How does one analyze a company with no earnings and still going for an IPO? how about a startup?
Not-so-Smart,
pretty strange name. The fact that you are asking this question, i think you are smart. I had a post on this topic. Check this link out http://www.theincomeportfolio.com/2009/04/how-to-do-a-realistic-valuation-for-new-ipo/
Good research work, you explained how you made this report, real hard work.
Hats off to you.
Mohammad Khalid Siddiqui’s last blog post..ICRA : Buy
Khalid: I am glad you enjoyed reading it. Thanks for your good words.
Hi, Can you please share the excel file(s) of the calculations. I could not find any fiels in toolbox. It looks great analysis.
Thanks,
Hello amstel,
The toolbox only shows the excel sheets for methodology. It will not have company specific data.
I do not share company specific data is because, I expect readers to make an effort and come up with their own company specific data sets.
Best Wishes,
Tip guy,
Question regarding NTPC and all the Power companies that deal with COAL and thermal power, i know you are long on NTPC, however haven’t you ever considered the fact that the world leaders including Indians are very concerned about the green house effect and these companies are very high on emission as they burn a lot fossil fuel, Now with so much emphasis on emission and with concept of Nuclear power in the future don’t you see any risk in these companies in a long run?
Nuclear energy, how much fuel do we in India have, so basically you expect Indian to live on nuclear energy and keep importing raw inputs? Do you think that is even remotely feasible? Yeah we will have nuclear energy but won’t remain dependent on it. Only one country in world is dependent of Nuclear energy (70% of its domestic energy), can you tell which country is this? It’s not US/Russia
suffice to say, I am not worried. There is huge difference between rhetoric and actually doing it. It takes resources and time.
I am not top down investor, I am bottom’s up.
Best Wishes
yes sir i know the answer its France, actually its 76.2% and they have a total of 59 plants generating around 63,473MW of power. From what you have written it seems that you don’t think we as a country can ever be successful in becoming a green country. “There is huge difference between rhetoric and actually doing it” i am not sure if i agree with this
Hi TipGUy
HAve you ever wondered about current performance of NTPC.. for past two year.. ?? I guess it is more or less staying around 200 Rs per share.. there was news about delay in project completions etc.. Did you had any analysis about how it is faring current market .. ? I think last one year appreciation in stock price is near 0% ( too lazy to cross check )
.. Even though 2 years is not a very long term, I think it is long enough to start worrying about 
esp when its peers have moved up
Hello John,
Thanks for sharing your concern. That’s what is good about statistics. One can easily pick and choose to make a point. I do this always
. Like you picked two years, I could pick some other timeframe to make it look good. And can pick any relative barometer, or relative comparison to make it either look good or look bad. However, that does not help me.
In today’s environment, when we live on day-to-day news events (Reliance Power?) we lose sight of long term sustainability. Holding a stake in NTPC is much much and much better, than putting money in cash or FDs. Low downside risk and low risk for loss of capital. I do not think many folks understand the implications of loss of capital. So I won’t go there! Imagine in 2008 and put NTPC in context of loss of capital vis-a-vis market.
Other side of the coin is, folks who expect to use NTPC as a spring board to riches. In that case, I do not fault with NTPC. But I do find fault in the chain of thought process OR I do find fault in “objective” analytical process. Yes, I am oblivious to NTPC’s performance vis-a-vis current markets. The questions is does it matter to me?
The question that matters to me is what role NTPC plays in my portfolio, and why I bought in first place. Certainly, I am not oblivious to that.
My apologies, if this sounds little sarcastic, that’s not my intention. Message is, analyze in a given context and then only it will result in success. If you are looking for market beating (or market meeting performance), then checking out NTPC is wrong step.
Best Wishes,
Hi TIP GUY
.. I strongly agree with your comments abt NTPC is better than keeping money in bank savings or FD.. In the stock market crash 2 year back , only two stocks that helped me out was NTPC and power grid.. I like those shares for their performance during recession..
I do agree with your point above and also to your new post about this
But being a complete novice in stock investments( read as lack of knowledge & lack of time to monitor my portfolio) , i do tend to compare the returns of my stock picking with index returns half yearly/ annually .. It just a measure that I use to see whether I can at least match the general market performance or the performance of some good diversified mutual funds..If I cannot match that , I will prefer to pay commission to my mutual fund managers, than picking stocks myself …
As long as my stock picks gives me better returns than general markets, I am happy .. if not, then i have do some research to find out why its lagging.. in the case of NTPC, I was not able to find any reason for its under performance ( except few delays in project completions).. I was just wondering about it
Hello John,
Nothing wrong in your rationale of using market index. Your chain of thoughts also seems to be in right direction.
Having said that, I would still not compare individual stocks to index/Mutual Funds. How can you compare “individual performance” with “collective performance”. It does not jive with me to compare “one company in India” with “US economy”. I hope you get my point. Compare “your portfolio” to “index/MF”.
Best Wishes,
Hi TIP Guy,
Did a quick analysis based on Balance sheet and PL account, the average ROC for about past 5 years is some where around 10%, which implies that the NTPC is not putting the capital to good use efficiently / the business by its nature is not a very profitable business. Also, NTPC has about Debt/Total Capital ratio about .38 with a trend of debt increasing Y-o-Y.
Based on these two reasons, I personally find NTPC to be not a strong company fundamentally for long term investment.
Thanks
Arun.
Hello Arun,
Thanks for your thoughts. I cannot comment, since, I do not use the parameters you discussed. What does it mean when you say “… not a strong company fundamentally for long term investment…. ”
- will not provide growth of invested capital? in other words, it will not have capital appreciation?
- will it not have market beating capital appreciation? will it have less growth compared to peers?
- will invested capital be not safe? will it result in loss of capital?
How does it affect you as an individual investor?
Best Wishes,
Hi TIPGuy,
What I meant by not fundamentally strong is that the NHPC based on past performance does not give good returns(PAT) for the capital that it deploys into its business. Therefore, by projecting the same past average performance for the future years, NHPC’s capital (equity + reserves surplus) cannot be expected to grow at a good rate (compared to other businesses – do not know about NHPC’s peers).
May be I can share my valuation template with you over email which is based on Balance sheet and PL account (It is based on an article by Shyam Pattabhi’s column in The Hindu – http://www.shyamscolumn.com/2009/05/hunting-for-value-in-stocks.html)
As an investor I am looking for companies that can grow its capital Y-o-Y through efficient management of its business and pass on the surpluses as dividends to the investors. NHPC doesn’t seem to be promising to me in that sense.
However, this is all based on NHPC’s past performance ‘numbers’ only and not a qualitative analysis of its business.
Thanks
Arun
Hello Arun,
Well, the post was not about NHPC….. so what else can I say? Check out my thoughts when NHPC IPO was issues. http://www.tipblog.in/opinion/power-companies-leading-the-renewed-ipo-buzz/
Best Wishes,
Sorry, I meant NTPC, not NHPC in my previous comment. But NHPC is also not a candidate for long term investment based on a similar analysis.
Dear TipGuy,
Greetings.
Please send the templates to me over my email, appriciate it as it will help me to understand the stuff better I am a novice.
Dear Tip Guy,
Greetings.
Quick query: Do u have simliar analysis for Bharti Airtel
Please send if you have with supporting excel on my email id.
Regards
Thanks for the pearls of wisdom. These would be very helpful to newbie investors. I am always thankful to see others giving high quality info towards community. Will be referring a lot of friends about this. Keep blogging.
Thanks