Motilal Oswal maintains Buy on NTPC as revised norms reduces risk to earnings from lower PLFs

For NTPC, Motilal Oswal expects earnings CAGR of around 14 percent over FY17-20, driven by strong capitalisation. As capitalisation outpaces capex, return on equity will get a boost and re-rate the stock.

Motilal Oswal maintains Buy on NTPC as revised norms reduces risk to earnings from lower PLFs
For NTPC, Motilal Oswal expects earnings CAGR of around 14 percent over FY17-20, driven by strong capitalisation. As capitalisation outpaces capex, return on equity will get a boost and re-rate the stock.

> Swapping/flexible coal linkage has reduced the landed cost of coal, particularly for plants that were located far from coal mines and suffering from low PLF. The benefit, however, is likely to be small.

> In May 2017, the regulator introduced a mechanism to compensate plants suffering from low PLF. In case of Mouda I & II plant, the new mechanism provides a relief of around Rs 21 crore (around 63 percent of the actual loss) over May-October 2017.

Higher plant load factor not only drives incentive income, but also generates efficiency earnings through lower auxiliary and oil consumption, as well as a better station heat rate (SHR).

As PLF declines, the operating parameters deteriorate, impacting incentives and leading to under-recovery in fuel cost. Average PLF of coal-based plants declined from around 82 percent in FY14 to around 79 percent in FY17. Notably, three plants had PLF of less than 75 percent in FY14, which increased to five plants in FY17.

This is due to a confluence of increase in overcapacity in the country; and addition of new plants –Mouda and Barh – away from coal mines, with relatively uncompetitive fuel cost.

Motilal Oswal said the impact of lower PLF was recently quantified in case of Mouda I & II plant. It operated at PLF of around 64 percent from May to October 2017, which is lower than the design norms, resulting in fuel cost under-recovery of around Rs 32.9 crore, in addition to the lost opportunity of earning incentives.

The current regulations are not considering the impact on equipment life (operations and maintenance allowance) due to the likely increase in frequency of ramp-up and ramp-down of plants due to RE.

However, Motilal Oswal believes this will be taken up by the regulator at an appropriate time.

For NTPC, it expects earnings CAGR of around 14 percent over FY17-20, driven by strong capitalisation. As capitalisation outpaces capex, return on equity will get a boost and re-rate the stock.

Favorable outcome in the gross calorific value (GCV) measurement issue can boost earnings by around 7 percent, it feels.

Source: moneycontrol