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India’s largest electricity producer NTPC Ltd reported a 1% drop in volumes from a year ago. Photo: Bloomberg
India’s largest electricity producer NTPC Ltd reported a 1% drop in volumes from a year ago. Photo: Bloomberg

Power | Fundamentals remain weak

Power generation rose 4%, slower than the 5-9% growth the sector saw in the earlier two years

Power producers had another subdued quarter. Power generation rose 4%, slower than the 5-9% growth the sector saw in the earlier two years. The plant load factor, or utilization level, softened 2 percentage points to 63%, reflecting weak demand. India’s largest electricity producer NTPC Ltd reported a 1% drop in volumes from a year ago. Tata Power Co. Ltd’s stand-alone sales volume fell 2%. Falling fuel prices, meanwhile, lowered realizations. As a result, the power business of both the firms saw a year-on-year decline in revenue.

Adani Power Ltd and Reliance Power Ltd delivered good growth. But the performance is not driven by organic factors. Production scale-up at the Sasan ultra mega power project helped Reliance Power report strong growth in revenue and profit. Compared with a loss a year ago, Adani Power reported a profit of 101 crore. But the performance was boosted by recognition of compensatory tariff. “Normalized earnings, based on clarifications provided by the management in its earnings call, are weaker versus reported earnings," Nomura Research said in a note.

Nevertheless, the performances did not move the needle much. Adani Power did not see any notable upgrade in earnings estimates. Earnings estimate for NTPC were cut—Elara Securities (India) Pvt. Ltd reduced its earnings per share estimate by 4% for this fiscal and 3% for FY17. Tata Power has seen some earnings upgrades. But that was driven by expectations of lower loss at Mundra and stable coal business.

By and large, analysts continue to remain wary about the sector. Improving fuel supplies notwithstanding, two factors continue to cloud the sector outlook. One is poor demand. Government steps to revive the bankrupt state electricity boards—the biggest buyers of electricity in India—are yet to bear fruit. As a result the sector continues to operate at sub-optimally low utilization levels--PLF stood at 63% in January.

Ratings agency India Ratings and Research Pvt. Ltd expects electricity demand to grow modestly (4-5%) in the next fiscal. “The muted demand growth will be driven by the expectation of muted growth by industrial consumers, which constitutes 40% of the energy sales," India Ratings and Research wrote in a note.

Second is the regulatory overhang. Major firms (NTPC, Tata Power, Adani) are seeking regulatory orders (verdicts), the outcome of which remains uncertain. Overall, while there were no negative surprises, no signs of revival emerged in the last quarter either. R. Sreeram

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