NTPC’S earn­ings are un­der a cloud as coal short­ages con­tinue to bite

Mint ST - - MARK TO MARKET - Sreeram@livemint.com

NTPC Ltd is a reg­u­lated busi­ness and its power pur­chase agree­ments as­sure it of min­i­mum re­turns. So an ex­pan­sion in ca­pac­ity should log­i­cally drive earn­ings. In­stead, the com­pany’s profit fell 0.5% in the Septem­ber quar­ter de­spite a 4.4% ex­pan­sion in ca­pac­ity from a year ago.

An­a­lysts have cut the com­pany’s FY19 earn­ings es­ti­mates by 4%, and with the re­sults fall­ing short of ex­pec­ta­tions, NTPC shares fell 4.3% on Mon­day.

Earn­ings are un­der pres­sure be­cause of a short­age of coal, which in turn has hit uti­liza­tion, lead­ing to fixed cost un­der-re­cov­ery. While the man­age­ment ex­pects the sit­u­a­tion to im­prove, in­vestors are still scep­ti­cal, as the fall in the stock on Mon­day sug­gests.

Im­prove­ment in fuel sup­plies is con­tin­gent on a ramp-up in pro­duc­tion and de­liv­er­ies from Coal In­dia Ltd, whose track record has NTPC’S ther­mal plant uti­liza­tion lev­els dropped to a multi-quar­ter low in the sec­ond quar­ter of fis­cal year 2019. been unin­spir­ing.

“The man­age­ment is hope­ful of the sit­u­a­tion im­prov­ing and ex­pects full-year un­der-re­cov­ery to re­duce to ₹600 crore (₹1,400 crore in FY18) im­ply­ing re­coup- ing of past losses,” an­a­lysts at SBICAP Se­cu­ri­ties Ltd said in a note.

Adding to the scep­ti­cism is the slow com­mer­cial­iza­tion of new projects. As an­a­lysts at SBICAP Se­cu­ri­ties add, NTPC added only 800 megawatts (MW) till Septem­ber-end against the com­mer­cial­iza­tion tar­get of 4,000MW. But an­a­lysts are not wor­ried about ca­pac­ity ad­di­tions yet.

Given the com­plex­ity of the projects, a de­lay of a quar­ter or two in com­mer­cial­iza­tion of power plants will not be a deal­breaker for in­vestors. But as the ex­pe­ri­ence in the past two quar­ters shows, the new ca­pac­i­ties by them­selves will not count for much un­less the fuel avail­abil­ity sit­u­a­tion im­proves.

In fact, the com­pany may see fur­ther cuts in earn­ings es­ti­mates next quar­ter if the guided re­duc­tion in cost un­der-re­cov­er­ies does not ma­te­ri­al­ize.

“Given man­age­ment’s past op­er­a­tional track record, we are giv­ing the ben­e­fit of avail­abil­ity linked un­der-re­cov­ery to be con­tained by the year end,” an­a­lysts at Jef­feries In­dia Pvt. Ltd said in a note.

To con­clude, NTPC may have en­vi­able project pipe­line as­sur­ing growth. But if ca­pac­ity growth isn’t go­ing to re­sult in earn­ings growth, in­vestors can be ex­pected to re­main luke­warm to the stock.

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