NTPC: Charging up for better days

Capacity additions could aid revenue growth, but a pickup in demand for power is crucial

Subdued electricity demand has hurt the power sector, including state-owned NTPC. Some comfort: When the plant load factor (PLF, or capacity use) for coal power plants in India was 63 per cent in January 2016 (down 150 basis points year-on-year), NTPC's capacity use was 79 per cent, lower from its January 2015 level of 82 per cent.

Of 910 megawatts (Mw) capacities planned to start operations by the March quarter, stage two of NTPC's Barh Super Thermal Power Station for 660 Mw recently started operations. Incremental capacity additions are critical to improve volumes. About 18,000 Mw of new capacities (under construction) are likely to be commissioned by FY20. Kotak Institutional Equities pegs the asset capitalisation against these projects to be around Rs 130,000 crore, implying an incremental annual profit of Rs 6,200 crore for NTPC.

While this is in the long term, the December quarter saw NTPC's revenues decline eight per cent; volumes were down a per cent year-on-year. As 'other income' halved to Rs 245 crore due to lack of incentive income, lower interest income and maturity of bonds under one-time settlement scheme, and interest expenses jumped 18 per cent to Rs 825 crore (on higher capital expenditure), net profit fell 19 per cent year-on-year. This pulled down the profit growth in nine months (to 2.4 per cent), versus five per cent in the first half of 2016-17.

According to Central Electricity Regulatory Commission rules for FY15-19, NTPC gets an incentive of Rs 0.5 per kilowatt power generated by plants operating at 85 per cent or above PLF. According to Elara Capital, six out of 20 plants (versus five in FY15) operate at a PLF of 85 per cent or more, but overall PLF dipped from 80 per cent in FY15 to 78 per cent in the December quarter.

But, the mood around NTPC's stock is positive. Jefferies says, "after the decline in FY14-16, NTPC's earnings should increase at 12 per cent compound annual growth between FY16 and FY18." Deepak Agrawala of Elara Capital says, that even as poor demand is a serious issue, NTPC is a low-beta stock, with less variability in core earnings. "A strong balance sheet gives a lot of comfort to investors with an assured return on equity (15.5 per cent) above global peers," Agrawala says.

At 11 times FY17 price-earnings, valuations are supportive. The government is reportedly planning an 'offer for sale' on Tuesday at a four per cent discount to current price of Rs 127. This could lead to some short-term pressure in the counter, providing a good entry.