Analyst Corner: ‘Hold’on NTPC; coal shortage will dampen core RoE

By: | Published: November 10, 2018 2:21 AM

Despite 10% y-o-y rise in regulated equity, H1FY19 adj. PAT at Rs 51 bn was flat y-o-y on under-recovery due to (a) coal shortage at newly-commissioned high-cost plants (Rs 5 bn), (b) plant outage at Unchahar due to fire accident (`2.6 bn) and (c) planned maintenance outages (Rs 1 bn).

mtpc, coal sector, coal industryNTPC reported Rs 14 bn under-recovery in FY18

Despite 10% y-o-y rise in regulated equity, H1FY19 adj. PAT at Rs 51 bn was flat y-o-y on under-recovery due to (a) coal shortage at newly-commissioned high-cost plants (Rs 5 bn), (b) plant outage at Unchahar due to fire accident (`2.6 bn) and (c) planned maintenance outages (Rs 1 bn).

Consequently, core RoE declined ~300 bps y-o-y to 17%. Declining core RoE trend remains the key concern. Though NTPC’s earnings prospects appear bright due to capacity addition (4 GW in FY19/20) and rise in regulated equity (9/10% y-o-y in FY19/20), this will be overshadowed by ongoing under-recovery due to coal shortage that will dampen core RoE. This coupled with regulatory risk of lowering the base RoE below 14% from FY20 in the upcoming tariff policy provides limited cushion.

‘Hold’. Under-recovery to dent core RoE: NTPC reported Rs 14 bn under-recovery in FY18 (coal shortage: Rs 8 bn, plant outage: Rs 6 bn) and Rs 8.4 bn in H1FY19. Management expects under-recovery due to plant outage to be reduced in H2 with commencement of Unchahar plant (December 2018); however, coal shortage at recently-commissioned plants of Mauda, Solapur, Kudgi to continue.

Management expects under-recovery of Rs 6 bn in FY19, which will dent core RoE. Concerted efforts to address coal shortage – need of the hour: Management highlighted steps to address coal shortage: (1) ramp up production from own mines – Pakri, Dalunga –targets 7 MMT/10 MMT in FY19/20, (2) Resort to imported coal, (3) Inked contract with Indian Railway (IR); NTPC to pay IR freight advance (`100 bn) for coal transport for FY19/FY20 and in return IR to render preferential allotment of rakes to NTPC.

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