. NTPC: Generating power

NTPC’s shares have been volatile since the announcement of the June quarter results. The broader market volatility also played its part, but some element of pessimism seems to have crept in after the results came in.

There were many one-off items that depressed the company’s profits. This left the street wondering whether there is more pain in store.

But a pipeline of projects that will come on stream over the course of 2019-20 and till 2021-22 (nearly 15 GW) makes its current valuation look attractive. The stock trades at eight times its trailing 12-month earnings as against its historical three-year average of 12 times.

NTPC’s possible acquisition of the government’s stake in SJVN and NHPC has also weighed heavily on the stock.

The fear among investors seems to be that if NTPC buys NHPC or SJVN to fund the government’s disinvestment targets, it could curtail its dividend. NTPC is currently a high dividend- paying PSU (dividend yield of 4-5 per cent).

While these are concerns, the pessimism may be slightly overdone. The pipeline of projects, offering good revenue visibility, lends comfort to earnings over the next three years.

One-time impact on PAT

The net profit in the June quarter at the standalone level was flat at ₹2,603 crore. Revenue from operations grew just 7 per cent to ₹24,193 crore.

At the consolidated level, profit after tax (PAT) was ₹2,840 crore. The standalone profit for the quarter was impacted by a one-time impact of an additional charge under the old deviation- settlement mechanism that occurred in the June quarter.

This had a ₹150- crore impact on the June quarter’s profits. However, since the regulator has exempted power producers from paying this charge henceforth, there will not be any impact in the ensuing quarters.

Additionally, there was a ₹150- crore one-time impact due to use of older inventory of coal at some power plants in the Vindhyachal belt (Uttar Pradesh), which had a low gross calorific value (GCV). This meant the loss of GCV was higher than that permitted by the power regulator’s norms.

Hence, NTPC’s tariffs charged to power distributors were depressed to that extent. This is not expected to recur in the subsequent quarters as the company has fresh coal stocks available.

Contribution to earnings from NTPC’s subsidiaries and joint ventures is also likely to go up as more projects near commercial operations. The company has also set up a coal subsidiary to undertake all its coal mining activities and sell surplus coal to third-parties.

Possible acquisitions

While concerns over NTPC acquiring the government’s stake in SJVN and NHPC have also weighed on the stock, the management has clarified that discussions with the Centre on an SJVN stake buy had taken place two years ago.

Also, there has been no talk so far of NTPC buying stake in NHPC.

NTPC is still interested in buying SJVN because it would help boost its non-fossil fuel-based power-generation portfolio, and not particularly on account of the government’s insistence alone.

The company has plans of non-fossil fuel-based power to contribute nearly 30 per cent of its 130 GW planned installed capacity by 2032.

Pact with Coal India

There was some apprehension that a strike at one of Coal India’s subsidiaries would hamper power production at three plants, but NTPC says it has signed a long-term fuel supply arrangement with Coal India for an annual contracted quantity of 172 million tonnes per annum. The company’s plan to add nearly 5 GW of installed capacity every financial year till 2021-22 will automatically give a boost to its profits.

This comes at the back of muted commercial capacity addition in 2018-19.

The equity that is currently tied up in the capital work-in-progress or projects under construction will be freed and start earning returns for the company.

At the end of March 2019, the regulated equity base (REB) in projects commissioned stood at ₹53,989 crore; the management expects this to cross ₹ 60,000 crore by the end of 2019-20.

By the end of 2021-22, REB is expected to touch nearly ₹ 86,000 crore.

As more projects are commissioned, the investments made by NTPC in them will start earning returns and add to the cash balance.

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