NTPC: Awaiting fresh triggers

New rate directives will keep RoE under stress; favourable verdict on rates could boost sentiment

Since hitting a low of Rs 137.20 in February, the NTPC stock has risen 15 per cent to Rs 158 levels. The relatively better profitability in the December 2014 quarter despite new Central Electricity Regulatory Commission (CERC) tariff regulations gave confidence to investors. After such a sharp run-up, the stock seems to have been fairly priced.

In the Budget, proposals to raise the clean energy cess from Rs 100 to Rs 200 a tonne of coal is likely to be passed on to power generation companies such as NTPC. Which in turn, will pass it on to consumers as costs are pass-through in the regulated power business. Although the proposal to set up five new ultra mega power projects (UMPPs) of 4 gigawatt each in the ‘plug-and-play’ mode is a positive for power producers, the benefits accruing to NTPC will depend on whether it can bag any of the proposed UMPPs.

The Street would focus on the near-term prospects. One of the harshest recommendations in CERC’s new regulations on tariff is the withdrawal of incentives related to plant availability factor (PAF) and withdrawal of tax arbitrage. In the new model, incentives are based on plant load factor (PLF). The new model will hurt the company’s return on equity (RoE), which analysts expect will remain subdued. Analysts at Ambit say NPTC’s RoE would decline to 9.6 per cent in FY15-17 from 12.9 per cent in FY14, owing to the CERC’s new regulations. Under the current scenario, NTPC is likely to report 85 per cent PLF over FY15-19 compared 91 per cent over FY09-13. Hence, incentives will be negligible. Even if NTPC is allocated sufficient mines to improve its PAF higher than 85 per cent, analysts do not see its PLF improving. NTPC has aggressively put multiple applications for rich mines, with eight bids, followed by Singareni Collieries Company with six bids.

The benefits to the company can accrue if its appeal against the new tariff norms gets a positive verdict. While many reforms have taken place, the government’s initiative towards improvement of demand, distribution reforms and improving availability of domestic fuel are the next leg of reforms, say analysts at Motilal Oswal Securities.

NTPC, with a robust business model and low leverage could emerge a key beneficiary of reforms towards improving fuel supply and demand. All these could act as triggers and drive earning upgrades. However, the Bloomberg consensus target price of Rs 156 points to a limited near-term upside.