NTPC delivers stable December quarter; capacity additions key
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A regulated utility like NTPC Ltd, which is assured of minimum returns, can maximize investors’ returns in two ways. One is optimal utilization of assets. The second is capacity addition. But unfortunately, the company was unable to impress or spring up a positive surprise in either of these in the December quarter (Q3).
Despite the favourable base, electricity generation is up just 1%. Mimicking the subdued demand trends, thermal power plants’ utilization fell by a percentage point. Even then, revenues grew 11%, thanks to new capacities. Operating profit or Ebitda (earnings before interest, tax, depreciation and amortization) is up by about 9%. The growth, however, did not translate into net profit, which dropped 7.5% due to normalization of taxes. The year-ago quarter saw low tax outgo.
The performance, though broadly in line with Street estimates, has nothing to be excited about. The NTPC stock lost 0.8% on Wednesday.
Still, the regulated business model and strong capacity additions pipeline (15,000 megawatts or MW in fiscal years 2017 to 2019) means NTPC is one of the most preferred stocks in the power generation sector. Valuations at 1.4 times book value and 13.4 times 2017-18 price-to-earnings multiple are not expensive either.
While this should hold NTPC in good stead, it alone will not ensure stock outperformance. As the company guided for strong capacity additions, thus raising earnings growth expectations, investors drove up the stock, which gained 39% in the last one year. Quarterly performances have been steady. But earnings are yet to see the kind of growth analysts are envisaging. In fact, NTPC’s stand-alone earnings per share in the first nine months of the current fiscal year are down 8%.
Capacity additions are expected to lift growth. But delivery on this front has been poor till now. Against the current year target of 4,880MW, the company has till now added only 1,400MW of thermal power.
In a conference call with analysts, the management expressed confidence in meeting the targets. But the target is steep and the stock is factoring in the benefits of capacity additions. “NTPC has not commercialized any large capacity in Q3 and thus, capitalization is pushed to Q4FY17,” Religare Capital Markets Ltd said in a note.
Another issue that can have a bearing on earnings is the impact the new methodology to calculate the gross calorific value of the coal its power plants consume, will have on finances. Though fuel costs are a pass through, there are fears the new system will raise NTPC’s costs. The exact impact of this new mechanism will also be known only by the end of current fiscal year, putting the burden of expectations on the current quarter (Q4).