Fundamentals improving, but stake sale remains a major overhang for NTPC

Though growth in regulated equity led by capacity expansions will drive earnings, coal supplies impacted by monsoon can lead to rise in under-recoveries during September quarter

India’s largest power generating company, NTPC, remains in the news due to commissioning of its new capacities. As the company announced the start of Unit-1 (first of the two units of 800 megawatt, or Mw, each) of Lara Super Thermal Power Station (Chhattisgarh), the spotlight was shared by the start of a 660 Mw unit of India’s first ultra-supercritical power plant at Khargone, Madhya Pradesh (MP), on September 30.

The plant has higher efficiency, with coal supply from NTPC’s own mines in Jharkhand ensuring fuel safety. While the second unit of the plant is to be commissioned by February 2020, the total installed capacity of NTPC and the NTPC Group has already grown to 48,645 Mw and 57,106 Mw, respectively.

 

The company has incurred higher capital expenditure on the Khargone plant at about Rs 8.4 crore per Mw, compared to Rs 6.5-7.5 crore per Mw for other projects under construction, say analysts, but the same is due to the use of superior technology and a dedicated 37-kilometre railway line. Nevertheless, on account of higher plant costs, the tariff will also be higher, say analysts at Kotak Institutional Equities. Further, looking at higher operating efficiency (3.3 per cent higher than conventional supercritical power plants) and power purchase agreement (50 per cent with MP and 34 per cent with other states), analysts remain positive.

With continued capacity additions, the company should see an increase in its regulated equity base, thereby driving its earnings. Regulated equity is the quantum of shareholders’ funds eligible for fixed returns, according to regulations. Analysts at Emkay Global say NTPC expects to add 5,300 Mw in 2019-20 (FY20) and 5,000 Mw in 2020-21 (FY21), which should result in 15 per cent annual growth in the regulated equity over the next three years.

The underrecoveries from customers, however, remain a critical issue, considering coal supply problems. The plant availability factor till July 19 (FY20) has remained high at 87.2 per cent, compared to 83.8 per cent in the year-ago period due to better coal supplies, say analysts. However, due to rains and flood impacting coal production and dispatches, the Street is watchful now. Analysts say while the management had guided for zero underrecovery in FY20 and the June quarter saw 75 per cent lower underrecoveries, near-term concerns persist.

The stake sale by the government remains a major overhang, say analysts, though Rupesh Sankhe at Elara Capital says NTPC is trading at a historically low multiple of 1x FY21 estimated price-to-book, which looks attractive.