As capacity additions gather steam, fuel supply concerns emerge at NTPC

Over the past month, shares of NTPC Ltd have remained powerless, down about 7%. The company said last week that it added 1,320 megawatts (MW), which takes it closer to its annual capacity target of 5,000MW. The capacity additions augur well, though, and the firm’s regulated business model assures a fixed return on invested equity.

Still, the stock’s lacklustre reaction implies investor concerns about earnings. As pointed out in previous columns, NTPC’s earnings have in recent years barely kept pace with capacity additions.

Fuel security for one of the newly added plants (Unit-1 of the Khargone super thermal power station) depends on a production ramp-up at one of NTPC’s captive mines, points out Motilal Oswal Financial Services Ltd. If production does not scale up, the company will have to secure coal from other mines that are not so close.

In fact, even as NTPC fully commercializes the new plants, red flags are emerging regarding its running plants. Production at Coal India Ltd, the biggest producer of the fuel, has been hit by protracted rains. Production in September plummeted 23.5% from a year ago. In the six months to September this year, coal production was down 6%.

The drop in production has affected dispatches to the power sector. In August, for the fourth consecutive month, coal dispatches to the power sector have fallen, points out Elara Capital (India) Pvt. Ltd. The shrinking dispatches have been reducing coal inventories at thermal power plants, though the situation is not yet alarming.

Analysts fear that falling output at Coal India and dispatches to the power sector may hurt NTPC. Apart from impacting power plant utilization levels, insufficient coal can weigh on fuel availability at power plants. This fall in plant availability beyond a certain level impacts the incentive income of NTPC.

Recent data from the Central Electricity Authority shows a notable reduction in utilization and availability levels at NTPC’s power plants in August. Also, generation fell sharply (down 8%), though it is not yet clear how much of this is due to seasonal factors such as maintenance shutdowns.

If the trend in September continues beyond the current month, it would have a noticeable impact on the company’s earnings. “NTPC’s Q2 FY20 earnings may be subdued owing to lower coal stocks at its pithead plants given muted supply by Coal India. However, NTPC is planning to import around 2-2.5 million tons of coal even for its pit-head stations, etc., to avoid plant availability under-recovery in Q3 FY20. Thus, for the Corporation’s Q3 FY20 profit growth, coal supply growth (from Coal India) and imports are key monitorable," analysts at JM Financial Institutional Securities Ltd said in a note.