Lower fuel costs propel NTPC's profitability

Revenues fell 6.5% but operating margins improved 580 bps in Q4

With the demand for electricity continuing to remain muted, revenues for NTPC declined 6.5 per cent year-on-year to Rs 17,990 crore in the March'16 quarter (Q4) and missed Bloomberg estimates of Rs 18,704 crore. Total income at Rs 18,113 crore also dipped 6.2 per cent y-o-y. However what offset the top-line miss was the lower operating expenses, which fell 13.3 per cent (Rs 12,655 crore). This was led by fuel costs, which accounts for 80 per cent of operating expenses, and declined by 18.8 per cent y-o-y.

According to the management, the shift to domestic procurement for coal and reduction in dependence on imports has helped reduce fuel costs. Even on a sequential basis, fuel costs remain at subdued levels and cost of coal is on the decline expect NTPC to draw more gains from this front. However, finance cost, which went up 21.5 per cent in Q4, dragged the net profit down to Rs 2,716 down by 7.7 per cent. This was ahead of Bloomberg estimates at Rs 2,429 crore.

Operationally, the March'16 quarter was positive for NTPC with plant load factor (PLF) standing at 81.3 per cent. While this is lower by 138 basis points y-o-y indicating weak demand, there are signs of some pick-up when seen against the December'15 quarter PLF of 78.2 per cent. Another comforting factor is that PLF of NTPC continues to remain ahead of all-India levels (63 per cent) and even that of private power producers (62 per cent). Increase in commercial capacity by 1,960 megawatts (Mw) in FY16 also helped NTPC post better than industry PLF. With the management expecting to commission 2,500 Mw in FY17, sustenance of PLF should not be a worry for NTPC. A capital expenditure of Rs 30,000 crore is planned for in FY17. The low base effect of FY16 should also help. However, as electricity demand remains weak, the average rate might stay downwards as it declined to Rs 3.18 per unit versus Rs 3.24 per unit seen in the December'15 quarter.

  Nevertheless, an analyst from a domestic brokerage affirms that lower tariff or revenue growth should not deter investors. "As NTPC works on pass-through model, revenues will decline when fuel costs moderate. But, as PLF and net profit is growing ahead of the industry, there is not much worry." The bigger kicker would come when demand increases, as that will help improve capacity utilisation, enabling the company earn incentives leading to better return on equity levels. NTPC is among the preferred picks in the power sector and 31 out of 41 analysts polled on Bloomberg recommend 'buy' on the stock.