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File photo of an NTPC plant in Gujarat.
File photo of an NTPC plant in Gujarat.

Falling under-recoveries and capacity additions power the lights at NTPC

  • With coal supplies improving, the cost of under recoveries will reduce significantly in FY21, giving fillip to NTPC’s earnings
  • The challenge for NTPC and other electricity producers are the rising dues from power distribution companies

MUMBAI : After reporting a steep 71% fall in net earnings in Q4, shares of NTPC Ltd lost 2% on Monday. Profit plunged as the company incurred additional expense toward settling tax disputes. Adjusted for this, net profit would have fallen just 0.5%, said analysts.

“NTPC did a one-time settlement of 2,700 crore on past taxation cases, of which 1,800 crore is recoverable in tariffs and 900 crore is not," Jefferies India Pvt. Ltd analysts said in a note.

Revenue grew 28% year-on-year, reflecting better realizations. Importantly, the results indicated a significant reduction in revenue loss due to cost under-recoveries. Revenue loss due to shortage of coal (fuel) dropped from 800 crore in FY19 to 249 crore in FY20. The overall generation readiness of plants, known as plant availability, improved 2.56 percentage points to 89.67% last fiscal year.

With coal supplies improving, cost under-recoveries will reduce significantly in FY21 as well. This can give a fillip to NTPC’s earnings. “With average coal stocks at NTPC plants at around 29 days in May 2020 (vs 20 days in March), we do not find a risk of future under-recoveries," JM Financial Institutional Securities Ltd analysts said in a note.

On the mend
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On the mend

The company commercialized 5,200 megawatts (MW) of capacity at the group level in FY20, and aims to add more (5,900 MW) in the current fiscal year. Given that NTPC is allowed fixed returns on equity invested, the capacity additions can add meaningfully to its current earnings base.

But meaningful earnings benefits may be seen only from FY22. Following directives from the government, NTPC is offering a rebate of 1,363 crore on the capacity charges billed during the lockdown period to power distribution companies (discoms). These rebates can negate some benefits of capacity additions in FY21.

Also posing challenges are rising dues from discoms and weak demand. According to the Praapti portal, which tracks payments to electricity generators, the overdue amount to NTPC rose sharply from 10,900 crore in February to about 13,300 crore in April. According to analysts, dues have since risen. “NTPC’s overdue SEB receivables are now 18,000 crore. This is expected to reduce with the 90,000 crore credit line through Power Finance Corp. and Rural Electrification Corp. that is being offered to the SEBs," Dolat Capital Market Pvt. Ltd said in a note. SEB is state electricity board.

Utilization levels of thermal power plants meanwhile dropped from 76% in FY19 to 68% last fiscal, reflecting weak demand. While NTPC’s regulated business model cushions it from demand vagaries, optimal utilization of power plants will help it maximize returns from its investments.

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