NTPC: strong generation, anaemic profits in Q3

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NTPC Ltd may have clocked record electricity generation in the December quarter. That robust operational performance, however, is not to be seen in its financial results. Tracking the 10% rise in generation, gross sales increased 7% from a year ago. But net profit declined 4%.

Earnings were hit by three factors. One of them is pay revision. The second is the unusual rise in leave encashment by employees. The third and the biggest hit came from fixed cost under-recoveries at three power plants. As a consequence of the shortage of coal at these plants, the company was unable to recover fixed costs fully, hurting earnings. Excluding this impact and other adjustments, the net profit would have grown by 8%, the management told analysts.

Even then, the results may not please investors. Despite healthy generation, NTPC’s reported profits fell for the second consecutive quarter. Adding to the concern is continuing tightness in fuel availability at the affected plants. The government has set up a study group to address the problem. But it is not expected to be resolved quickly, given the complexities of the situation, which is dependent on the availability of rail transport and quick ramp-up of coal production.

That said, investors have reasons to be optimistic. Power demand has seen noticeable improvement in recent months, the management told analysts. This improvement in demand (partly caused by the unexpected drop in wind energy generation) led to unusual usage of thermal power, leading to coal shortages towards the end of 2017.

This sudden change of events did hurt NTPC in the December quarter. But the demand recovery, if it holds, should benefit the company in the long run.

NTPC is in the midst of capacity additions. By March 2019 it plans to add about 6,900 megawatts. With very few fresh capacities under construction in the industry, the company can see noticeable earnings benefits if demand sees a sustainable improvement.

“Traditionally, NTPC has been among the foremost beneficiaries of rising PLFs given that it has some of the most efficient and low-cost plants. While the core trigger for NTPC remains its pace of capacity addition, which will double its regulated equity base, we believe current market price does not factor most of the above triggers,” JM Financial Institutional Securities Ltd said in a note. PLF is plant load factor, a gauge of utilization levels.

The future indeed holds promise. But the challenge for NTPC investors is to overcome the intermediate earnings disappointments.livemint