NTPC Ltd is a regulated business and its power purchase agreements assure it of minimum returns. So an expansion in capacity should logically drive earnings. Instead, the company’s profit fell 0.5% in the September quarter despite a 4.4% expansion in capacity from a year ago.
Analysts have cut the company’s FY19 earnings estimates by 4%, and with the results falling short of expectations, NTPC shares fell 4.3% on Monday.
Earnings are under pressure because of a shortage of coal, which in turn has hit utilization, leading to fixed cost under-recovery. While the management expects the situation to improve, investors are still sceptical, as the fall in the stock on Monday suggests.
Improvement in fuel supplies is contingent on a ramp-up in production and deliveries from Coal India Ltd, whose track record has been uninspiring.
“The management is hopeful of the situation improving and expects full-year under-recovery to reduce to ₹ 600 crore ( ₹ 1,400 crore in FY18) implying recouping of past losses," analysts at SBICAP Securities Ltd said in a note.
Adding to the scepticism is the slow commercialization of new projects. As analysts at SBICAP Securities add, NTPC added only 800 megawatts (MW) till September-end against the commercialization target of 4,000MW. But analysts are not worried about capacity additions yet.
Given the complexity of the projects, a delay of a quarter or two in commercialization of power plants will not be a deal- breaker for investors. But as the experience in the past two quarters shows, the new capacities by themselves will not count for much unless the fuel availability situation improves.
In fact, the company may see further cuts in earnings estimates next quarter if the guided reduction in cost under-recoveries does not materialize.
“Given management’s past operational track record, we are giving the benefit of availability linked under-recovery to be contained by the year end," analysts at Jefferies India Pvt. Ltd said in a note.
To conclude, NTPC may have enviable project pipeline assuring growth. But if capacity growth isn’t going to result in earnings growth, investors can be expected to remain lukewarm to the stock.