Does NTPC need to find a new growth engine?
NTPC Ltd has reported a steady performance for the March quarter. Revenue increased 11.5%, but profit from continuing operations dropped 25.5% on pay hike related expenses and an impairment charge. Excluding this impact, profit would have grown.
The company did reasonably well on other operating parameters also. Gross generation was up about 2%. Thermal power plants operated at 81.2% plant load factor (this indicates utilization levels). It added 3,845 megawatts (MW) of new capacities last fiscal year. In the current fiscal year, it plans to add 5,430MW of new capacities. As these capacities come on stream generating revenue, NTPC’s earnings are expected to get a boost from the next fiscal year.
The strong project pipeline in the growth-starved conventional energy sector is enviable. While the potential earnings benefits should comfort investors, the yearly trends question this assumption. In three years to FY17, the installed generation capacity at the group level on an average increased by 5.4% per annum. But generation rose by 2.4% per annum. Revenue was up by less than 5% per annum and profit was little changed.
Importantly, the utilization levels of the core thermal power plants steadily trended downwards. They dropped from 81.5% in FY14 to 78.6% in FY17. Of course NTPC is comparatively better placed—the thermal power sector has seen a far steeper fall in utilization levels. But in the context of subdued demand, growing preference for renewable energy, falling solar tariffs, stringent norms for thermal power plants that crimp returns, it has to be seen if new capacities will provide a commensurate boost to earnings.
The Institute for Energy Economics and Financial Analysis (IEEFA) expects utilization levels at coal-fired power plants to fall further and NTPC to track these trends. “Importantly, with renewables targeted to reach 175GW by 2022 and 275GW by 2027, IEEFA sees no respite for coal-fired plant capacity factors. NTPC’s capacity factors will continue the downward trend along with the rest of India’s coal-fired electricity industry, which will undermine the sustainability of any business models based on coal-fired generation,” adds IEEFA. GW stands for gigawatts, which equals 1,000MW.
Still, the regulated business model that assures minimum return on equity and the strong project pipeline provides earnings certainty. But for NTPC to deliver strong earnings momentum over a long period of time, either demand has to see structural recovery or the company has to find a new growth engine.
NTPC is rightly focusing on renewable energy opportunities. But as IEEFA points out, the company can narrow its focus on renewable energy and tap opportunities in overseas projects. Another option is to capture opportunities in storage and electric charging stations, which it is exploring.