BackNTPC moves to improve return on equity, but is it enough?
Improved power plant availability and operating efficiencies point to an RoE improvement in the third quarter against the dismal performance in the first half of the year
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NTPC Ltd’s stock has trailed not only the Sensex but also the BSE Power Index so far this fiscal.
The main investor concern hovers around inefficient capital allocation by the company and its muted return on equity (RoE). To be sure, it was well known in advance that the company’s RoE would be hit after the Central Electricity Regulatory Commission, or CERC, notified its tariff norms for 2014-19 which calculate incentive income based on plant utilization as compared with plant availability earlier. But then, earnings haven’t been all that exciting either.
Now, the firm has decided to issue bonus debentures worth ₹ 10,300 crore to existing shareholders by the end of the quarter. This issue will increase NTPC’s leverage and reduce its equity base, thus improving its RoE by up to 1.2 percentage points in the coming fiscal. On the flipside, however, increased interest outgo and a reduction in other income owing to this debenture issue could well impact NTPC’s earnings.
But improvements in some operating yardsticks in the December quarter have warded off that threat for now. Capacity utilization for coal units, or plant load factors, improved to 81% in the three months to December, compared with 73% in the previous quarter. Generation improved 4% from a year ago while average availability of coal-fired power plants improved about 15 percentage points sequentially to 91.4%. NTPC needs to maintain plant availability above 83% to recover fixed costs.
Still, revenue growth over a year ago was flat as realizations fell and earnings before interest, taxes, depreciation and amortization (Ebitda) fell 2%. Reported profit after tax grew 7%, mainly owing to a tax write-back. But the improved power plant availability and operating efficiencies do point to an RoE improvement in the third quarter when compared with the dismal performance in the first half of the current year.
Yet, that hasn’t done enough to boost the stock after the results, since the third quarter might be a one-off.
Investors are perhaps expecting more action from NTPC, such as faster execution of projects under construction. That will release equity stuck in these projects which is currently earning no returns. The company has said it will add 1.1 gigawatts (GW) capacity on its own and 1.5GW along with the affiliates in the March quarter. It also has announced it will invest ₹ 60,000 crore to build renewable capacity of 10,000 megawatts over the next five years, but it is debatable whether that will improve returns given the dismal track record of such companies in India so far. The coal mine auctions and the company’s track record in developing mines—as can be seen from the Pakri-Barwadih captive coal block in Jharkhand—are also overhangs on the stock.
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