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Home / Markets / Mark To Market /  Why India’s best-placed power utility NTPC is getting the cold shoulder

The 16% fall in the shares of NTPC Ltd over the past one year has been disappointing. Not just because valuations are undemanding—with the shares trading close to their book value. The company’s fixed return earning regulated equity base has been steadily growing and is projected to grow faster.

Capacity additions are projected to accelerate to 5 gigawatts (GW) per year from FY20 against the average annual addition of less than 3GW in the last two years. As a consequence, NTPC’s regulated equity is estimated to expand 15% annually from FY20 over the next three fiscal years.

The capacity ramp-up will boost the company’s finances. FY20 will mark the beginning of the reversal of the capital work in progress (CWIP) ratio. The ratio as a percentage of property, plant and equipment, and CWIP is estimated to fall from 42% in FY19 to 36% in FY20 and 24% in FY21, projects NTPC. The fall in the ratio will enhance return on equity as the equity blocked in CWIP would start generating returns.

Still the Street is not convinced. The NTPC stock continued to fall on Thursday inching closer to its 52-week low. Why? Lack of commensurate growth in earnings. Operating earnings grew just 5% in FY19 despite a notable expansion in installed capacity base and regulated equity.

Worse, reported profit grew just 1% last quarter and adjusted earnings lagged Street estimates by a wide margin. “Street was almost certain that 1QFY20 would mark a turnaround for NTPC with most past issues having been suitably resolved. However, 1QFY20 results sprung a surprise with higher losses on account of usage of carpet coal (low value coal)—management highlighted the same as a one-off, and we hope that it does not recur, such that earnings profile is reflective of underlying capacity addition," said analysts at Kotak Institutional Equities in a note.

Second is the overhang of the government share sale. There is a fear that the Centre may sell hydropower producer SJVN Ltd to NTPC, similar to Oil and Natural Gas Corp. Ltd’s purchase of Hindustan Petroleum Corp. Ltd, and the Power Finance Corp. Ltd-REC Ltd deal.

Such a transaction will enhance NTPC’s regulated equity base. But it can scuttle its dividend payouts in the short term, warns an analyst. SJVN has a market capitalization of 9,500 crore. If NTPC has to buy a majority stake exhausting its close to 3,000 crore cash reserves, then its ability to maintain current dividends can be impacted, says the analyst on condition of anonymity.

Perhaps clarity from the government will help. NTPC has been one of the consistent dividend payers. In FY19, the dividend yield was more than 5%.

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