Power utilities: Tight supply yields limited earnings benefit
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It has been a remarkable quarter for electricity producers. Prices in the short-term power market perked up and thermal power generation has noticeably risen as hydro and renewable power generation lagged. Total power generation was up 5.3%, compared with 1.4% in the year ago quarter. Utilization also noticeably improved.
But plant shutdowns and higher costs mean the benefits are not openly visible in earnings. Generation at JSW Energy Ltd, which is most exposed to the short-term power market among large firms, was down 2.5%. Still, thanks to better merchant realizations, higher other income and savings in operation and maintenance costs, operating profit before exceptional items rose 4%.
The financial numbers of NTPC Ltd and Tata Power Co. Ltd did not excite either. Revenues were largely unchanged and net profits were suppressed by adjustments and write-offs. Tata Power benefited from higher coal prices.
But higher coal prices also raised the fuel cost under recovery at the firm’s Mundra plant. The firm is looking to use lower grade coal options to contain costs.
Adani Power Ltd reported a profit, compared with a loss in the year-ago quarter. But as Nomura Research points out in a report, uncertainty about recovery of compensatory tariffs and debt servicing concerns cloud the stock’s outlook. That said, state-run NTPC stole the attention among power generators. The company is beginning to see the benefits of capacity additions. Power generation was up 7% as it capitalized around 3,300 megawatts (MW) of capacities in the first half of the current fiscal.
With the firm planning to add another 800MW in the rest of the fiscal, taking the total capacity additions to about 4,000MW (for FY18), analysts see strong earnings momentum in coming quarters. “Capitalization is expected to accelerate further in FY19 and FY20. We expect regulated equity CAGR (compound annual growth rate) of ~20% over FY17-20E. PAT (profit after tax) is estimated to grow at ~14% CAGR in FY17-20E,” Motilal Oswal Securities Ltd said in a note.