Low fuel costs aid NTPC, but demand revival is key

The new capacities will improve NTPC’s revenue visibility, but the benefit can be felt only after a year or so


Fuel cost is a pass-through for NTPC’s regulated business model.
Fuel cost is a pass-through for NTPC’s regulated business model.

Shares of NTPC Ltd gained 2.29% on Monday after the company reported a lower-than-expected drop in net profit for the March quarter. Against the Street estimate of 17% decline, profit fell 8% from a year ago. The results have prior period adjustments. But even after accounting for this, the performance bettered Street estimates. This is primarily due to low fuel expenses, which dropped almost 19% from the year-ago period. Fuel costs fell as the power generation company used less imported coal.

Fuel cost is a pass-through for NTPC’s regulated business model. As the benefit was passed on to customers, average tariff fell, resulting in a 6% drop in revenue. Generation volumes grew slightly (up 1%), pointing to subdued offtake. Coal-power plants’ utilization or plant load factor (PLF) fell marginally from a year ago. But one cannot read too much into this as new capacities are still in the ramp-up stage.

That said, NTPC had a good start for 2016-17. Generation in April grew by an impressive 10% on higher demand. Utilization levels expanded four percentage points to 81%.

According to Nomura Research, 10 of 16 coal-fired plants operated at a utilization rate of more than 85%, making them eligible for incentives. “Electricity generation in excess of 85% PLF was 1,461 million units, implying incentive-linked income at Rs.0.7 billion,” the brokerage firm said in a note.

The company said in a filing to BSE on 26 May that it opened the Pakri-Barwadih coal mining project in Jharkhand. Domestic coal availability improved. With gas prices cut and the outlook for supplies (imported gas) improving, it is hopeful of reviving its gas power plants.

Low fuel costs should help NTPC, but they alone may not be sufficient to revive the stock, whose valuation at 10 times one-year earnings estimate is undemanding. For the stock to see an upward movement, demand or generation trends have to see a sustained recovery. True, March and April were good for the company. But it is not yet clear if the uptick is due to seasonal factors like heatwaves or improving demand.

The firm plans to add 3,760 megawatts (MW) of new capacities in 2016-17. As these capacities get commercialized by the current fiscal year-end, 2017-18 is estimated to see an addition of around 4,000-5,000MW, raising the current installed capacity by around 10%. The new capacities will improve NTPC’s revenue visibility. But the benefit can be felt only after a year or so. In the meantime, the earnings performance will be driven by electricity demand and low fuel costs.

The writer does not own shares in the above-mentioned companies.

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