NTPC’s falling cost under-recoveries, capacity additions brighten outlook

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MUMBAI: NTPC Ltd has reported better-than-expected performance for the March quarter. Revenue grew 28% reflecting better realizations.

Reported profit plunged 71% from the year ago quarter as the company incurred additional expense towards settling tax disputes. Adjusted for this, net profit would have fallen just 0.5%, point out analysts.

“NTPC did a one-time settlement of Rs2,700 crore on past taxation cases, of which Rs1,800 crore is recoverable in tariffs and Rs900 crore is not,” analysts at Jefferies India Pvt Ltd said in a note.

Importantly, the results indicate a significant reduction in revenue loss due to cost under-recoveries.

Revenue loss due to shortage of coal (fuel) and unavailability of power plants dropped to Rs249 crore last fiscal from 800 crore in FY19. The overall plant availability improved 2.56 percentage points to 89.67% last fiscal.

With coal supplies improving, the cost of under recoveries will reduce significantly in current fiscal year (FY21) as well. This can give a fillip to NTPC’s earnings.

The company commercialized 5,200 megawatt (MW) of capacity at the group level in FY20 and aims to add more (5,900 MW) in the current fiscal. Given that NTPC gets a fixed return on equity it invests, the capacity additions can add meaningfully to its current earnings base.

“NTPC’s FY20 results give confidence in under-recoveries sustainably going lower and we have marginally revised our FY21E-22E EPS higher. The company is best placed to benefit from additional incentives in the event of an economic recovery as power demand will rise,” analysts at Jefferies India Pvt. Ltd said in a note. EPS is earnings per share.

The challenge for the state-owned company and other electricity producers are the rising dues from power distribution companies.

According to government’s Praapti portal, the overdue amount rose by half to about Rs15,000 crore in April from 10,000 crore in February. According to analysts, the dues have risen further. “NTPC’s overdue SEB receivables currently is at Rs18,000 crore. This is expected to reduce with the Rs90,000 crore credit line through PFC/REC that is being offered to the SEBs,” Dolat Capital Market Pvt Ltd said in a note. SEB stands for state electricity board.

The other variable to keep a tab on is the demand recovery. Utilization levels of thermal power plants dropped to 68% last fiscal from 76% in FY19, reflecting weak demand conditions. While NTPC’s regulated business model cushions it from demand vagaries, better utilization of thermal plants will help India’s largest power generator maximize returns from its investments.

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