India’s largest coal-based power producer — NTPC — is one of the few power companies that will add new thermal capacity over the next three years. Given its robust position in the power segment, stable plant load factor (PLF) and attractive valuation, investors with a two to three-year horizon can buy the company’s shares. It also has a near-monopoly in thermal power production and is the largest power utility company in India. It delivers solid dividend yield to investors consistently, which makes it an attractive proposition.
NTPC’s coal-fired power plants had the highest PLF in the industry of 77.70 per cent for the quarter ended December 2018, according to data from Central Energy Authority.
The company’s trailing 12-month price-to-earnings multiple or PE ratio of 12.41 times is in line with its three-year average. The price-to-book value ratio of 1.27 is still inexpensive. Though not strictly comparable, JSW Energy trades at triple-digit trailing price-earning multiples.
The stock corrected over 25 per cent from its peak last year, before rallying smartly once again over the past few months to its current price level of ₹134.
It is a relatively stable and a somewhat defensive bet. NTPC pays dividend consistently and yields were above 4 per cent over the past few years, making it an attractive bet for medium-risk investors.
Leadership in power
As India’s leading power producer, NTPC is poised to benefit from the increase in demand for electricity. The peak power demand in FY19 stood at 177 GW (1GW=1,000 MW) and is expected to reach 225.75 GW by the end of FY22. NTPC is one of the few power producers investing in new thermal capacity and has coal linkages for most of its power plants; any shortage of coal from Coal India Ltd will be made up through imports. For the quarter ended December 31 2018, domestic coal (from Coal India and captive mines) made up nearly 99.6 per cent of its total fuel intake. NTPC’s regulated cost-plus and return-on-equity model provides enough predictability to cash flows. The company can charge a rate of return over and above its cost and is assured a fixed ROE from its plants, provided it achieves a certain PAF (plat availability factor).
The new Central Electricity Regulatory Commission’s norms for 2019-2024 maintained a base case return on equity (ROE) at 15.5 per cent, but capped the equity to be considered for ROE calculation for plants above 25 years old at 30 per cent, which is lower than expected. The plant availability factor (PAF) threshold — the amount of time the power plant is available to generate electricity — is 83 per cent under the norms. Maintenance shut-downs will not be taken into consideration to calculate the PAF.
This will help cushion base PAF. Fixing a standard loss of 85 Kcal/kg on coal when received by thermal power producers, will reduce raw material cost, thus boosting the ROE. However, splitting fixed cost recovery into peak and off-peak periods, along with stringent working capital norms, evens out any gains that would have accrued. The new norms are balanced for NTPC.
India’s move towards cleaner power production will not have much impact on NTPC. The company has most of its upcoming commercial capacity addition linked with long-term power purchase agreements with state discoms (distribution companies). As of December 31, 2018, the NTPC Group had total installed power capacity of 53,166 MW, of which commercially available capacity is 51,706 MW. NTPC has a pipeline of 30,000 MW of thermal power projects, which will go on stream over the new few years.
NTPC recently bid and won an 85 MW solar project from Uttar Pradesh. By 2032, it plans to have 32,000 MW of renewable energy capacity.
Challenges in recoveries
Delays in clearing bills by discoms have weighed on most power producers, and NTPC is no different. The company is working with State Governments to make sure its dues are cleared. Andhra Pradesh undertook a bond issue in February to clear some of its overdue power bills.
On overdues above 60 days, NTPC will earn a penalty from discoms of 1.5 per cent a month. As of March 2019, overdues above 60 days amounted to ₹5,985 crore out of a total of ₹10,260 crore, according to the Centre’s Praapti portal.
Maintaining the PAF above 83 per cent will allow NTPC to recover fixed costs through tariff; else, it will lead to under-recoveries. It works in two ways; the power plant is either not available for production due to maintenance, repairs or there isn’t enough fuel available to ensure the PAF above the prescribed threshold. NTPC expects the under-recovery in FY19 to be around ₹750 crore, nearly half the ₹1,400 crore figure in FY18. It has also made efforts to tie-up fuel for its power plants.
NTPC reported a net profit of nearly ₹7,400 crore for the nine months ended December 31 2018, down 0.2 per cent compared with the same period in FY18. Revenues were ₹69,085 crore, up 14.5 per cent. Under-recovery in Q3FY19 dragged the company’s profitability down a little; this is expected to reduce from Q4FY19 onwards. As of September 30 2018, NTPC had a cash balance of around ₹4,359 crore.
The company has a reasonably low debt-to-equity ratio of 1.15, while long-term debt to equity ratio is 1.04 as of March 31 2018.