NTPC: RoEs likely to surprise positively

Allocation of 5 coal mines, promise of more earnings drive interest

India’s largest thermal power producer, NTPC, is being closely watched by the market, after the government reallocated five of its captive coal blocks last month. While this was expected, analysts say a lot depends on how soon the company will be able to begin production from these. These blocks are Chhatti Bariatu, Chatti Bariatu (South), Dulanga, Kerandari and Talaipalli. Other than this, analysts believe despite tight regulations, NTPC’s return on equity (RoE) should surprise on the upside in FY15. NTPC is also looking at acquiring near-complete capacities of private power generators.

While the sector’s outlook is seen to be improving, analysts are not unanimous on the quantum of gains that will accrue to the company from these events. For starters, while NTPC has conveyed it is confident production from two of its blocks,  Pakri Barwadih and Chatti Bariatu, would start from FY15-16, not all analysts are convinced. UBS says, “Land acquisition issues are not yet resolved, resulting in some vendors abandoning the Chatti Bariatu project. The mining contract for the Pakri Barwadih mine has not yet been re-awarded.” Delays are expected as 3.4 Gw of power capacity, slated to be commissioned by FY17, is dependent on this coal. The availability of coal from these mines might take longer, thanks to a six-month delay in mine development.

  Others are viewing the allocation as a big positive. Nomura believes the restoration of its captive blocks is a relief. The focus would now once again shift to the production start-up timelines from these blocks. The brokerage further states the five blocks have cumulative geological reserves of 2.3 billion tonnes, of which 1.3 billion tonnes can be mined.

According to consensus estimates, the company’s expected to exit FY15 with an RoE of 16 per cent but some analysts expect the company to report higher RoEs despite tighter norms. Religare expects NTPC to report an 18 per cent RoE, while Nomura expects regulated returns to be 17 per cent. Also, with inflation falling and growth picking up, would restrict any further decline in RoEs. Some also expect the company to miss its capacity addition target of 1.8 Gw in FY15. According to UBS, the current status of projects slated for commissioning in FY16-17 suggests further slippages. “More importantly, actual delays could be higher than headline delays, as the gap between commissioning and ramp-up is widening,” it notes.