BackNTPC ekes out better returns despite low generation
Returns were perked up by better fixed cost recovery and efficiencies
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NTPC’s performance in the June quarter has been muted, with sales dropping 6% from the year-ago quarter. Low demand from distributors led to a 7% drop in electricity generation. In mitigation, it can be pointed out that the company had to contend with a high base in the year-ago period.
Nevertheless, utilization or the plant load factor (PLF) for coal stations fell as much as 670 basis points to 77.6% in the last quarter, hurting incentive income. From around ₹ 130 crore a year ago, the PLF-based incentives fell to ₹ 78 crore last quarter, analysts say. This, along with low other income, led to a 3% drop in net profit. The performance is definitely uninspiring.
One bright spot is improvement in returns. Return on equity, or RoE, increased from a year ago to 5.1% in April-June, Emkay Global Financial Services Ltd said in a note. It is also better than the 4.7% RoE clocked in the March quarter.
Returns were perked up by better fixed cost recovery and efficiencies. Due to higher fuel availability, the plant availability factor for coal-based plants improved to 91.6% from 89.3% in the first quarter of the previous fiscal. This improved fixed cost recovery at newly commissioned plants. With coal availability improving, analysts expect fixed cost under-recoveries to fall further. That should support return ratios, which are otherwise hurt by the new tariff regulation.
But that alone can take the company only so far. For a structural pick-up in NTPC’s return ratios and earnings, demand from electricity boards should improve, which will help the company earn the crucial generation-related incentives. That is a difficult proposition.
To get around this problem, NTPC is focusing on two things. The first is to acquire regulated assets—plants that have power offtake agreements. That will add to the company’s asset base and increase the regulated equity, on which it will get assured returns.
The second is bundling of solar power. The company received approval to bundle relatively expensive solar power with electricity from plants that outlived their contractual obligations (power purchase agreements). The bundled cost works out to be cheaper than electricity from new plants, which should spur incremental purchases, IIFL Institutional Equities said in a note. While that sounds interesting, it has to be seen how well the company executes these strategies.
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