NTPC: Earnings trigger intact

Results were muted, but rising base of project commercialisation will drive earnings

September quarter tends to be a weak one for power generation companies and, hence, the Street expectations for NTPC were muted. Revenues increased eight per cent year-on-year to Rs 19,241 crore, while net profit, adjusted for tax write-backs recognised a year ago, was up two per cent to Rs 2,368 crore. But as these numbers came marginally ahead of analyst estimates, NTPC’s stock has gained four per cent after results.

Plant load factor or PLF, which indicates utilisation levels, was at 74.7 per cent in Q2 (lower than 77.3 per cent in Q2FY16) for coal-fed plants, thus impacting revenues. The quarter also witnessed some cost pressures due to a price hike by Coal India, and increase in coal cess and freight rates. Fuel cost stood at Rs 2.11 per kilowatt hour (kwh) as against Rs 2.07 per kwh a year ago, but as these costs were largely passed on, the per-unit realisation increased to Rs 3.43 from 3.21 in Q2FY16.

Marginal increase in gross generation (60,593 million units) also led to higher realisation. Going forward, much of the earnings growth hinges on NTPC’s ability to improve its gross generation, given that PLFs may remain weak in the medium term. Only five plants operated at a PLF of over 85 per cent, thus restricting any significant improvement in core return on equity in Q2 (19.9 per cent versus 20.7 per cent in Q2FY16). NTPC has maintained its forecast for installing capacity at 5,648 megawatts (Mw) in FY17, including 768 Mw for solar capacity, and expects to commercialise 3,725 Mw during the year. It has commissioned (started) 575 Mw till September quarter.

“NTPC will add 40 per cent of its existing 40,000-Mw commercial base in the next three to four years. Since this entire capacity has been signed (through power purchase agreements) at regulated return on equity, earnings growth will closely follow project capitalisation,” analysts at JM Financial explain in their note.

So, while the Street isn’t worried about earnings potential of NTPC, uncertainties around a probable coal cost under-recovery due to the change in computation methodology could remain a near-term overhang for the stock. While the company is confident that this may not affect its revenue recognition, analysts would keep a close eye on this point. For now, the Street isn’t factoring in for a downside risk from the change in methodology. However, the Street is bracing for a five per cent reduction in earnings estimate if under-recoveries were to be accounted for.