For NTPC, quarterly results are becoming a non-event


After falling for two consecutive days, the NTPC Ltd stock opened with gains on Wednesday. The stock lost 4.8% on Monday and Tuesday despite the company reporting a healthy performance for the June quarter. Tracking the 10% rise in generation volumes, revenue increased 11.5%. That’s in contrast to the year-ago quarter, when volumes fell 7%.

Eight plants clocked utilization levels of more than 85%, generating more incentive income. This pushed net profit up 4% to a better-than-expected Rs.2,369.5 crore.

What’s more, the management sounded confident about capacity additions. Excluding renewables, NTPC plans to commission 4,880 megawatt (MW) in the current fiscal year, more than double the capacity it added last year.

Next fiscal it aims to add 6,290 MW (including joint ventures). The strong commissioning target provides good earnings visibility as NTPC works on the regulated returns model—it has power purchasing agreements and is assured of fixed cost recovery.

The better-than-expected performance, commentary on capacity additions and changes in accounting principles (to IndAS) led to earnings upgrades. Two domestic broking firms raised valuation multiples for the next fiscal. But that doesn’t seem to have charmed investors.

The first reason is valuation. After a 28% rise in the last six months, the stock is trading at 1.3 times one-year forward book value estimates. Analysts are assigning a forward price-to-book valuation multiple of 1.5-1.6 times to NTPC, assuming a capacity additions-led earnings push. That suggests the gap between current valuation and analysts multiple offers decent returns. But then one has to keep a margin of safety, as a large part of the assumed capacities are yet to be commissioned.

Also Read: NTPC profit up 4.5% in Q1 on higher output

The second reason is information flow. Vital information such as generation trends and capacity additions, which determine quarterly earnings, are already known. Generation volumes are updated on the regulator’s website every month. It was known a month back that the NTPC’s generation volumes grew in double digits in the June quarter.

Third, generation growth slowed to 3% in July and utilization levels fell drastically due to new capacity additions. While it points to slowing demand trends and warrants caution, information about the other key variable—capacity additions—is being shared at annual general meetings and investor conferences.

So given the regulated business model, analysts can more or less forecast the earnings trajectory, including the incentive income. Quarterly results can either deviate from these estimates or throw up negative surprises. Thankfully, the June quarter results did not include either of them.

Nor did the post-results commentary indicate any earnings booster, such as early commissioning of projects under construction or favourable changes in regulations.

While this gives no reason for the investors to drive up the stock in a hurry, it also raises an important point—the reduced relevance of quarterly results for NTPC.