MOSL: NTPC (Buy)-Revised norms provide relief from low PLF inefficiencies-Valuations attractive

​NTPC: Revised norms provide relief from low PLF inefficiencies; Valuations attractive; Maintain Buy

(NTPC IN, Mkt Cap USD22.8b, CMP INR178, TP INR211, 19% Upside, Buy)

Declining PLF impacting operating efficiencies of plants

• Higher plant load factor (PLF) 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).
  
• We note that 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 ~82% in FY14 to ~79% in FY17. Notably, three plants had PLF of less than 75% in FY14, which increased to five plants in FY17 (Exhibit 1). This is due to a confluence of (a) increase in overcapacity in the country and (b) addition of new plants –Mouda and Barh – away from coal mines, with relatively uncompetitive fuel cost.
  
• The impact of lower PLF was recently quantified in case of Mouda I & II plant. It operated at PLF of ~64% from May to October 2017, which is lower than the design norms, resulting in fuel cost under-recovery of ~INR329m (annualized, it is ~1-2% of the regulated equity of the plant), in addition to the lost opportunity of earning incentives.
  

Lower coal cost and relaxed regulatory norms provide some relief

• Two developments have provided some relief from the impact of lower PLFs:
  
• Swapping/flexible coal linkages: The absolute amount of under-recovery is also a factor of landed fuel cost. 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.
  
• Relaxed regulatory norms: 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 ~INR210m (~63% of the actual loss) over May-October 2017.