New tariff guidelines, coal supply bottlenecks dent NTPC's prospects

NTPC has underperformed the broader market with its share price currently at Rs 144, similar to levels seen a year ago

NTPC, the country’s largest power generation company, with an installed capacity of 43,128 Mw, has found itself beset with the various concerns surrounding the sector.

Tight coal supply has been the primary reason for most generating companies not maintaining performance. For NTPC, specifically, the impact of the regulatory guidelines on the rates of return from distribution companies is more worrying.

On the bourses, thus, NTPC has underperformed the broader market. At Rs 144, its share price is similar to levels seen a year before. A good rally was seen in the stock after the general election results, with increased expectations of the new government giving a push to the power projects. The rally fizzled on rising concerns regarding coal blocks, with the Supreme Court finally de-allocating the bulk of those given to corporate groups. Some of NTPC’s were spared but, overall, the verdict meant more of constraints in coal availability, not good news for the company.

NTPC’s expenditure on fuel was 85 per cent of its total operational expenditure during 2013-14. The bulk of this pertained to coal (89 per cent) itself. Though coal costs have been rising, the major impact on profitability is being provided by the Central Electricity Regulatory Commission’s new rules, as coal costs generally remain a pass-through.

In the new CERC guidelines, one of the harshest is to withdraw the incentives related to Plant Availability Factor (PAF). Withdrawal of tax arbitrage adds to the problem, as reduction of station heat rate incentives to the company also get reduced.

K Biswal, the finance director at NTPC, says the main challenge is that the operating norms in the 2009-14 regulations, based on which it made investments, have changed. “One cannot implement or one cannot ask us to face the operating norms with retrospective effect. If at all these are applicable, we can apply it on new projects, new capacity additions that would come after the promulgation of new tariff (rate) regulations. It should not apply for the existing and under-construction projects,” he said at an investor call.

The standalone Ebitda (earnings before interest, taxes, depreciation and amortisation) margins have continued to decline, from 27.3 per cent for the June 2013 quarter to 18.1 per cent in the June 2014 one. The return on equity (RoE) is likely to come down from 22-23 per cent to 17-18 per cent if the new CERC regulations remain in force. NTPC has challenged these at the high court in Delhi.

Coal availability continues to be a problem and has restricted output. In his interactions with analysts after the first quarter results, however, Biswal said gross generation at 63.133 billion units during the April-June quarter increased 10.8 per cent over the previous year’s 57 bn units. The plant load factor (PLF) of coal-based stations was 84.3 per cent for the first quarter against 79.1 per cent in the same period a year before.

The PAF was 89.3 per cent for the first quarter as against 84.9 per cent last year, an increase of 444 basis points (bps). However, for gas-based plants, this was 90.1 per cent for the June quarter as against 94.4 per cent last year. NTPC generated 19.1 billion units in August, up six per cent, contributing to 21 per cent of total generation, partly driven by a four per cent increase in capacity base.

However, Elara Capital’s reports suggest the coal stock has worsened, with 15 plants of NTPC aggregating 30,000 Mw (verses 12 plants in June and seven in May) having less than seven days inventory. Overall, PLF was 80 per cent, up 785 bps over a year but still below the normative level of 85 per cent, affecting the incentives. Though the lower PLF in August can also be attributed to the monsoon season, when heat levels come down, NTPC saw a slide in PLF from 90.8 per cent in FY10 to 81.5 per cent in FY14.

Depreciation and interest costs have also been rising. While these are also largely pass-through, the crucial factor is the new guidelines that have a bearing on the RoE, a key parameter that analysts take into consideration while valuing any stock.