NTPC takes the self-reliance route

NTPC’s decision to enter the hydel project with two large projects is part of its strategy to reduce dependence on the thermal power segment. It has signed a memorandum of agreement with the Arunachal Pradesh government to set up two hydel projects with a capacity of 4,500mw. Though hydel power projects have a different risk-return profile, compared to thermal projects, they are attractive enough for players such as NTPC to venture into. It is already implementing hydel projects of 2,200mw capacity. The diversification would increase its operating leverage but would certainly lead to significant gains.

Hydel projects are highly capital intensive and have a large gestation period too, apart from higher degree of uncertainty over project execution. A comparison with National Hydro-electric Power Company (NHPC) puts things in perspective. While NHPC produced only five units of power for every Rs 100 of capital employed, NTPC produced 26 units with the same capital, as per latest available information. Similarly, capital employed per mw of installed capacity is Rs 5.9 crore for NHPC against 2.7 crore for NTPC.

The execution risk too is a worry, especially when compared to thermal projects. Hydel potential is mostly available in hilly terrain, which slows down execution. An important operating risk for thermal plants is non-availability of fuel. For hydel plants, apart from low rainfall, they run the risk such as high sedimentation which affects the life of the turbine.

If despite all these risks, NTPC is still expanding its exposure to hydel power, it is the opportunity to improve its already respectable profitability profile further. NHPC’s operating parameters show an operating profit margin of 88% and net profit margin of 47%. NTPC’s figures in comparison are 37% and 22%. If hydel contributes to even 10% of its total power generation capacity, its capital intensity would go up from Rs 2.7 crore to Rs 3 crore per megawatt, but its margins would improve significantly too.