DSM regulations, low GCV coal loss impacts profitability
Expect capitalization to pick up pace
Standalone (S/A) 1QFY20 adj. PAT decreased ~9% YoY to INR27b (14% miss on our est.). PAT has been adjusted for est. INR1.1b under-recovery (u/r) of fixed charge (FC) for this quarter. The miss is due to an impact of DSM regulations (~INR1.5b), carpet coal loss (~INR1.5b) and tax leakage on change in deferred tax recognition. Reported PAT, though, was up ~1% YoY to INR26b on lower FC under-recovery and higher other income, which jumped 2.4x YoY to INR3.3b on accrual accounting of late payment surcharge, in our view.
* New regulations for DSM (deviation settlement mechanism), which had tightened operating norms (since Jan’19), impacted the company’s profitability (~INR1.5b). These norms, though, have largely been reversed (since May-end), and subsequently, such an impact is unlikely to continue.
* Lower inventory levels at some of the company’s plants also resulted in the usage of older coal inventory, resulting in a loss of ~INR1.5b.
* The re-adjustment of DTA as income under regulatory balances (v/s being offset from DTL, earlier) resulted in a tax leak of ~INR0.8b, in our view.
* We believe that FC u/r declined to an est. INR1.1b v/s INR4.9b on restart of Unchahar and better coal availability at Mauda.
* Share of the JV PAT rose 16% YoY to INR1.5b. Performance of subs also improved with profit of INR0.9b (v/s loss of INR0.2b during the same period last year).
Capitalization to pick up pace, under-recoveries to decline; Re-iterate Buy
We believe factors (DSM, carpet loss) impacting NTPC’s 1QFY20 performance (~INR3b) are transient/one-off in nature; adjusting for which the benefit of FY20-24 tariff regulations is broadly reflected. We note that NTPC’s plant availability has started improving (PAF for its coal plants is up ~520bp YoY in 1QFY20). Besides, ~5GW of capitalization for FY20 appears to be on track. We expect capitalization to pick up pace, thus, driving regulated equity CAGR of 16% over FY19-21E; it should also outpace capex and boost RoE. Our DCF-based TP is INR165/share. Maintain Buy.
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