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Business News/ Market / Mark-to-market/  NTPC has to make more progress on capacity utilization
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NTPC has to make more progress on capacity utilization

The underperformance of the stock points to the progress the company still has to make

If plant load factors don’t improve, there is a chance that NTPC’s return on equity in the coming years will likely decline. That is an overhang on the stock. Premium
If plant load factors don’t improve, there is a chance that NTPC’s return on equity in the coming years will likely decline. That is an overhang on the stock.

Thermal plant load factors (PLFs), or capacity utilization, are improving at NTPC Ltd. PLFs rose from less than 70% in August to 74% in September and further to 81.6% in November, Central Electricity Authority data shows. Clearly, the coal supply situation seems to have improved, while demand for power has increased across the country. If the current trend continues, the company can look forward to a better second half of this fiscal year.

Why is that optimism not reflected in the share price movement? Since 1 September, when PLFs began to improve, the stock has fallen 3.5%. The S&P BSE 500 index in the same period gained 5%. The underperformance points to the progress NTPC still has to make.

Only five coal-fired power plants clocked a PLF of more than 85%. With the current regulations awarding incentives for running plants above 85% PLF, the company stands to gain only if it pushes PLFs beyond 85%. To be sure, some gains can already be seen. According to Nomura Research, electricity generation in excess of 85% PLF stood at 518 million units for NTPC in November, more than double the volume it registered in October. But it is a fraction of the 20.2 billion units of power the company produced that month.

There seems to be some scepticism among investors whether PLFs will increase beyond 85%. For that to happen, production at NTPC’s major power plants has to rise, which is contingent on factors like demand and fuel availability. While the former has shown signs of improving—up 8.7% so far this fiscal year compared with 1.7% in the previous one—there are still uncertainties whether the recent improvement in coal supply is sustainable.

What also bites is the firm’s track record in coal mine development. If the Pakri-Barwadih captive coalfield in Jharkhand had been commissioned on time, NTPC would had the capability to scale up the generation and PLF. Its delay has raised doubts in the minds of investors.

“Even if NTPC is allocated sufficient mines to improve its PAF (plant availability factor), we do not see its PLF improving, as the company would have to actually mine the coal, which appears uncertain, given NTPC’s experience at the Pakri-Barwadih mine," Ambit Capital Pvt. Ltd said in a note.

If PLFs don’t improve, then there is a chance that NTPC’s return on equity in the coming years will likely decline. That is an overhang on the stock.

The writer does not own any shares in the above company.

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Published: 11 Dec 2014, 08:22 PM IST
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