BackPower utilities show signs of stability
Major companies posted decent performances on a reduction in cost under-recoveries, an improvement in core businesses and lower fuel expenses
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Signs of stability emerged in the earnings of electricity producers in the March quarter. Major companies posted decent performances on a reduction in cost under-recoveries, an improvement in core businesses and lower fuel expenses.
NTPC Ltd reported a 16% increase in earnings before interest, taxes, depreciation and amortization (Ebitda), despite flat volumes.
CESC Ltd’s operating profit grew 6%, while Tata Power Co. Ltd’s fell on adjustments in the year-ago quarter. New capacities and higher generation helped Adani Power Ltd and JSW Energy Ltd report strong growth in operating profit. The reported numbers have adjustments. But even after accounting for them, the companies managed to better Street estimates.
Thanks to better incentives, NTPC’s regulated profit grew at a decent pace, Edelweiss Securities Ltd said in a note.
Tata Power’s earnings were underpinned by a reduction in under-recoveries at the troubled Mundra power plant and an improvement in performances at key businesses such as Delhi power distribution.
Adani Power benefited from better production and low fuel prices, while CESC’s earnings were supported by a sales ramp-up at the Haldia power plant and a stable distribution business.
To be sure, the firms continue to have pressure points. NTPC faced subdued offtake in Q4. Tata Power and Adani Power are waiting for tariff orders. CESC continues to make losses in its retail business and is still searching for customers for its Chandrapur plant. JSW Energy is seeing a steady drop in realizations. But the last five months have seen some of these concerns easing. Aided by good demand, NTPC has seen strong generation growth in April. Almost half of CESC’s Chandrapur plant demand is tied up now. The court has upheld Tata Power and Adani Power arguments for compensatory tariff.
So if the companies manage to build on the financial improvements they have made in the last quarter and headwinds ease further (in terms of demand and compensatory tariffs), then they stand a good chance of earnings recovery in the coming quarters.
Of course, sustainability of demand recovery is important and the companies have to address several other pain points, such as the retail business for CESC, coal business sale for Tata Power and huge debt for Adani Power. But inexpensive valuations—the sector trades at around 1 time price-to-book value and a price-to-earnings multiple of less than 10 times one-year forward earnings estimates—means a sustained improvement in core businesses can drive up stock valuations.
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