Power utilities: eye on key milestones helped investors overcome subdued Q3
Overall electricity generation in the December quarter was up 5.3%, only slightly better than the 4.4% rise in the year ago quarter
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The absence of negative surprises proved to be good news for power utilities. Against an 8% rise in the Sensex, the BSE Power index gained 10% in the first two months of 2017 even as the companies reported a lacklustre performance for the December quarter.
Overall generation was up 5.3%, slightly better than the 4.4% rise a year ago. Power production at NTPC Ltd was up just 1%. As power off-take remained subdued, the firm’s thermal power plants’ utilization dropped 1%. “3QFY17 has seen a continuation of the overall trend of weak power demand growth, subdued merchant prices, back-downs by discoms and marginal generation capacity addition,” Antique Stock Broking Ltd said in a review.
Due to a normalization of taxes, NTPC’s unadjusted profits fell 7.5%. JSW Energy Ltd reported an even steeper drop in profit on high costs and low realizations. Still, as the rise in the BSE Utilities index shows, investors attached little importance to the results. Why? Because of positive commentary from managements and the hope that 2017 will end the woes of Tata Power Co. Ltd and Adani Power Ltd.
NTPC maintained its 4,000 megawatts (MW) capacity addition guidance for the current fiscal despite adding just 1,400MW till December. Similarly, Power Grid Corp. of India Ltd, whose project start-ups grew just 2% from the September quarter, indicated strong capitalization in January-March. “As against ~4,650 ckm (circuit km) transmission line commissioned in 9mFY17, management is targeting to commission a ~4,750 ckm transmission line in 4QFY17E,” HDFC Securities Ltd wrote in a note.
Tata Power’s coal business venture did well. But high coal prices affected profitability of its Mundra plant. Adani Power reported a higher-than-expected loss on low volume off-take and shortage of domestic coal. Even then both stocks went up in January-February on speculation the coming Supreme Court order will end the under-recovery woes at their plants in Mundra, Gujarat. “For us, the key trigger remains the Supreme Court’s ratification of CERC (central electricity regulatory commission) compensatory tariff recommendations,” Edelweiss Securities Ltd wrote in a note on Tata Power.
The story is similar at CESC Ltd. The stock, too, has gained sharply, as the management said its Spencer’s retail business, which has been losing money, stopped making losses at the operating level in the last quarter.
Further, it also indicated it is open to listing the retail business, fuelling valuation gains. With the retail business showing signs of profitability, analysts are optimistic CESC’s return ratios will improve.
The optimism is also providing heft to NTPC, Power Grid, Tata Power, and Adani Power. The question is: will 2017 live up to the expectations?