Sector review: Fuel cost prunes power companies' operating margins

Power sector companies posted a 16.8 per cent growth in revenue during the quarter ended 30 June 2014 (Q1FY15), aided by a strong show by Adani Power, CESC, NHPC, Reliance Power and SJVN.

NTPC, Torrent Power and Gujarat Industrial Power also posted double-digit growth in revenue while Tata Power and Neyveli Thermal Power posted a declined in revenue.

Operating margins of power companies, however, declined by 240 basis points (bps), on the back of a 400 bps year-on-year rise in cost of fuel-to-sales ratio.

NTPC's profit margin was down 900 bps due to a 1000 bps rise in cost of fuel-to-sales ratio.

Net profit of power sector companies grew 25 per cent thanks to Adani Power, which pruned its net loss from Rs1,198 crore in Q1FY14 to Rs303 crore in Q1FY15.

NTPC: Reduction in operating margin by 900 bps can be attributed to a 35-per cent increase in fuel cost, compared to a 15.8-per cent growth in revenue. As per the Q1FY15 results released by the company, almost 53 per cent of energy sent out has "negative contribution on account of implementation of tariff regulation 2014", which hurt profitability. Management indicated that current quarter results may not be a true reflection of full year profitability.

Tata Power: Revenue declined by 6 per cent and profit was down 3 per cent on account of lower per tonne realisation of Indonesian coal amidst a global fall in coal prices. Operating margin declined by 174 bps as its standalone power segment suffered on account of higher cost of power purchased. Consolidated net profit adjusted for forex loss of Rs137 crore and compensatory tariff were lower than analysts have estimated.

Adani Power: Consolidated revenue doubled (up 106 per cent) powered by higher volume of power sold and recognition of Rs757 crore in compensatory tariff. A strong 1000 bps rise in operating margins reduced the net loss (after minority interest) to Rs303.29 crore, from a loss of Rs1,198.29 crore in Q1-FY'14.

Positives: According to Edelweiss Research, regulators have started acknowledging the concern of fuel under-recovery faced by developers and have either issued or are in the process of issuing orders for compensating them. International coal prices are down and the rupee remained stable, enabling imported coal projects to marginally reduce the cost of generation.

Negatives: Owing to the continued weakness in demand, power rates in the northern, eastern and western region remain subdued, reflecting lower PLF for merchant plants. Due to the uncertainty around new bidding norms, no new bids were floated leaving the recently commissioned projects stranded without power purchase agreement (PPA). Higher capacity charges continue to impact profitability.

Elara Capital Research's report on power indicated all-India volume growth of 13 per cent in August 2014. The coal situation has worsened with 56 plants (47 in July and 42 in June) having critical inventory aggregating 75 gigawatts (GW). All-India power generation volume was at 89.9 billion units, up 13 per cent (private up 40 per cent, government up 5 per cent). Thermal volume grew 22 per cent as plant load factor (PLF) improved by 498 bps to 61 per cent.

According to Nomura, blocking of coal bloc allocation between 1993 and 2010 (except for UMPPs) as illegal has put an overhang on the entire power utilities. Based on reading of the verdict and pending the court's direction on treatment of these 'illegal allocations', analyst believe that NTPC and Power Grid Corporation are placed relatively better off whereas JSW Energy and Power and Reliance Power are expected to face a significant risk to earnings and stock valuations.

Power sector quarterly growth rate %

Sales

Profit

FC/sales*

OPM/sales*

Q2FY14

9.16

-32.67

-11

-102

Q3FY14

13.31

16.34

-68

119

Q4FY14

23.20

1.41

-10

42

Q1FY15

16.80

25.30

399

-239

* YoY bps change in fuel costs and operating margin on sales

Data source: Capitaline +