Will strong electricity generation perk up NTPC earnings?

Investors have been uncharacteristically aloof to NTPC Ltd’s announcement that electricity generation grew 10% in the April-June quarter. It is the fastest quarterly growth the firm saw in almost two years. The growth supports the view that electricity consumption is in a recovery mode, with positive growth emerging from early this year. NTPC has 16% of India’s total installed power capacity.

The growth is happening on a favourable base. It is also possible that the performance was along expected lines. Growth was strong in April. With hydro electricity production lagging, the thermal sector is expected to see good growth in June also. Perhaps the optimism has already been captured in the 21% rise the NTPC stock saw in April-June this year.

While the benchmark S&P BSE Power index is up 8% during the period, it is not yet clear if strong generation will lift NTPC’s earnings. That is because the company works on regulated model-gets fixed returns. (NTPC has fuel linkages, power offtake agreements with discoms and is assured of fixed return on equity.) Incentives (which can influence earnings in a positive way) will kick in only if the firm’s utilization levels cross 85%. The plant load factor (PLF), which reflects the utilization level, remained below the threshold level in the first two months of the last quarter. PLF for June is not yet available.

But the moot point is utilization levels, though below 85% till May, are improving. According to Nomura research, PLF in the first two months of the current fiscal year expanded by 180 basis points from a year ago to 81.4%. During the period, seven of the 16 coal-fired plants operated at a PLF of more than 85%, making them eligible for incentives. A basis point is 0.01%.

“Electricity generation in excess of 85% PLF was 1,790 million units, implying incentive-linked income at Rs.0.9 billion,” Nomura said in a note.

The expectation is PLF recovery will help NTPC generate decent returns, which otherwise were compressed by the change in regulations sometime back, when the incentives structure moved from plant availability factor to PLF. “We maintain that NTPC should be able to achieve an operating Return on Regulated Equity of over 17% under the new tariff regulations,” Nomura added. While generation trends are good till now, much also depends on utilization levels in the coming months.