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Business News/ Markets / Mark To Market/  NTPC’s Q3 results show why it pays to be a regulated business model
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NTPC’s Q3 results show why it pays to be a regulated business model

Tariff hikes for certain plants and surcharge income it charges for payment delays boosted NTPC’s net earnings
  • With coal availability improving, NTPC should be able to recover fixed costs better
  • Graphic by Sarvesh Kumar Sharma/Mint Premium
    Graphic by Sarvesh Kumar Sharma/Mint

    A steep fall in production can spell trouble for a manufacturing company, but it was not so for NTPC Ltd. Electricity generation dropped 13% last quarter. Yet, adjusted profit grew by an impressive 35% to 2,953 crore.

    The growth in earnings can be explained by its regulated business model. Under this, NTPC is assured to earn a minimum return on equity. Even if the customer reduces electricity offtake, it is allowed to recover (some) costs, provided its plants are production-ready.

    The clause has come in handy with plant outages reducing last quarter. This lowered fixed-cost under-recoveries, which had dogged the company in FY19. Further, availability of the power plants improved, helping it receive better incentives. Power plant availability improved about three percentage points from the year-ago period to 88% last quarter.

    NTPC’s net earnings were also aided by the tariff hikes for certain plants and the surcharge income it charges for payment delays from customers, said an analyst.

    Of course, all is not hunky-dory. As the chart alongside shows, thermal power plant utilization levels dropped to the lowest levels in recent years. Utilization level, measured by plant load factor, dropped from 77.7% a year ago to 63.5% last quarter. The sharp fall mirrors sluggish demand.

    Overall, demand for electricity is estimated to have dropped by about 6% last quarter, compared to 6.7% growth in Q3 FY19. Additionally, generation costs were on a rise with average tariffs increasing.

    That said, the new year has begun on a positive note for the company. Provisional data from the Central Electricity Authority shows a slight growth in thermal power generation in January. NTPC’s commentary supplements the data. “Since the middle of January, energy demand is increasing; so our stations are operational; now we are generating more," the management told analysts.

    With coal availability improving, NTPC should be able to recover fixed costs better. After the central government notification stipulating a letter of credit, payments from states has started improving, the company told analysts.

    Meanwhile, NTPC has added around 3,000 megawatts (MW) of capacity so far this fiscal year. Additions for the full year are expected at 5,290MW.

    The new capacities will expand its regulated equity base. Now, it remains to be seen whether earnings follow suit. Profits have lagged capacity additions in the recent past and have weighed on the NTPC stock, which trades close to its FY21 book value and nine times FY21’s earnings estimate. This doesn’t appear demanding for a company with an enviable project pipeline.

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    Published: 09 Feb 2020, 09:28 PM IST
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