NTPCs withstands demand slowdown better but pressure points remain

Mumbai: After successive quarters of earnings misses, NTPC Ltd impressed the Street with strong profit for the September quarter. The stock gained 2% in Monday morning trade. Net earnings jumped 34.5% as the company benefited from levies on payment delays from customers -- power distribution companies. Adjusted for the surge in other income, standalone net profit grew 6.9% which is decent considering the constrained revenue growth.

Revenues grew a mere 2.3%, weighed down by 7% fall in generation. In this backdrop, the performance looks decent. “Adjusted for ~ ₹900 crore of treasury income we estimate core project level profit of ~ ₹2,600 crore. This profit on a regulated equity base of ₹53,200 crore translates into core project return on equity of ~20%,” analysts at SBICAP Securities Ltd said in a note.

Dig deeper and the pressure points are hard to escape. Thermal power plant utilization levels remain sub-optimal. Last quarter they dropped to 64.3%, from 72.6% a year ago.

Worryingly, fuel constraints resurfaced. This impacted availability of the company’s power plants, resulting in cost under recoveries or the loss of revenues. In September quarter, the amount is pegged at ₹330 crore.

The management is confident of recouping revenue loss in the second half of the current fiscal, helped by better fuel supplies. But the concerns do not end there. Demand challenges remain. The deceleration in power production in the country continues. India’s thermal power generation dropped 19% in October.

Second is payment dues from power distribution companies. As on August, total amount owed by buyers to generators stood at ₹61,133 crore. NTPC, with has power purchase agreements is still better off. Further, with the central government insisting on letter of credits to be issued by the buyers, the financial risk is mitigated.

Even then, dues from buyers continues to pile up. As of September quarter, customers owe NTPC ₹8,000 crore.

As a consequence, trade receivables more than doubled from March 2019 levels, impacting the company’s cash flows. “NTPC’s Q2FY20 performance reflected deteriorating financial health of discoms and domestic coal shortage. As a result, receivables (jumped) and cash flow took a hit (negative free cash flow in H1FY20),” analysts at Edelweiss Securities Ltd said in a note.