NTPC Ltd made good on its promise of reducing revenue loss due to fuel constraints. In the fourth quarter, revenue loss was reduced to ₹800 crore from ₹1,100 crore in the December quarter, implying a notable improvement. “Management delivered on its lower under-recovery target for FY19 of ₹800 crore. We had expected this to remain high, at ₹1,300 crore, with improvement built in only from FY20E," Jefferies India Pvt. Ltd said in a note.
The improvement triggered gains in the stock, which rose 3.14% on Monday. Expansion in its base capacity notwithstanding, the stock trailed the broader markets in the past year. Reported profit in the first nine months of FY19 largely remained flat, even as the stand-alone capacity base increased by 323 megawatts (MW). As cost recovery improved in the March quarter, profit jumped 48.7%.
Importantly, improving fuel supply trends means cost under-recovery can reduce further in FY20. The company is sourcing more coal from imports, Coal India Ltd and from its own mines. Incrementally higher coal supply is expected to improve NTPC’s plant availability, further reducing cost under-recoveries.
NTPC’s earnings can see significant expansion in FY20 due to new capacity additions. According to analysts, the company expects to commercialize 5,000MW at the group level in FY20. As commercialization of projects gathers pace, adding to NTPC’s regulated equity base, analysts expect the stock to further gain momentum. “Capitalization will outpace capital expenditure, boosting return on equity and driving re-rating of the stock," Motilal Oswal Financial Services Ltd said in a note.
While improving coal supplies and project addition trajectory should provide good support to the stock, much also depends on the demand and earnings quality. Slow progress on distribution reforms is exerting renewed pressure on state power distribution companies (discoms). They are large buyers of electricity from NTPC. This is reflected in rising dues from discoms.
Though NTPC is better placed to manage receivables through securitization and other methods, mounting dues can impact electricity offtake unless discoms streamline distribution reforms.
Power plant utilization trends are unexciting, though. The plant load factor of thermal units stood at 77.6% in the March quarter, down from 79% a year earlier. For the full year, it fell from 77.9% in FY18 to 76.7%. If financial troubles at discoms were to curtail electricity offtake, then utilization can see further softening. This can reduce the earnings gains of new capacity additions to some extent. While the new government at the centre is expected to step up distribution reforms, this is one key risk NTPC investors need to keep an eye on.