NTPC: generation volume up, earnings yet to reflect gains
The benefits of new capacity additions have begun to kick in for NTPC Ltd. As commercial capacity at the group level increased 4,680 megawatts (MW) from a year ago to 50,608MW by end-September, generation during the September quarter (Q2) rose 6.7%, the fastest rise in about a year. Utilization levels of coal power plants also improved, reflecting better demand conditions. The plant load factor of the coal power plants increased 1.96 percentage points from a year ago to 76.6%.
The financial performance, however, is yet to fully reflect these benefits. Revenue in the September quarter was up 1.9% while net profit and earnings per share fell in the range of 2.3-2.6%. The financial performance is broadly in line with Street estimates.
The September quarter has seen higher employee expenses and certain adjustments which suppressed the earnings to some extent. Even then, a 7% rise in generation volumes and a significant expansion in capacities should have ideally translated into better earnings performance.
According to an analyst with a domestic broking firm, two factors weighed on Q2 performance. One is the impact of the change in the way NTPC calculates the calorific value of fuel (coal) it receives from suppliers. The new formula, which is being contested, has raised costs. Second, the new power plants are yet to contribute to the company’s earnings (as they were commissioned at different times and benefits are yet to be annualized) even as the Q2 results accounted for their depreciation.
NTPC is expected to see benefits from new power plants (in terms of returns) in the coming quarters. Further, it expects to add another 800MW in the rest of the fiscal year, taking total capacity additions in the current fiscal year to about 4,000MW. As these plants achieve full commercialization, the company’s earnings are expected to get a boost.
The NTPC stock, which is up 10% in the last six months, is beginning to factor in this scenario. Adding to the optimism is strong electricity generation in October. Generation volumes are up about 15%, far better than the 2.8% growth the industry registered last month.
That said, given the company’s track record of delays in capacity additions and commercialization of projects, investors would do well to wait for earnings delivery. Another crucial factor is resolution of the calorific value measurement of coal. Even as NTPC works on the regulated returns or the cost-plus returns model, the proposed change is leading to uncertainty regarding the way costs are measured.