The power sector continues to remain in darkness as companies barely managed to grow, led by weak demand, rising input cost, lack of a power purchase agreements (PPA), subdued merchant rates and low generation due to lack of coal availability. On an aggregate basis, 14 power generation companies reported a mere 3.66 percent growth in FY18 revenue. During FY18, all India plant load factor (PLF) barely moved 50 basis points to 50.5 percent. In the case of coal-based power plants, PLF moved 80 basis points to 58.2 percent.

Growth in sales could not even absorb expenses. Total expenditure for the same set of companies rose 5.76 percent, leading to an about 1 percent decline in operating profit. Thanks to savings in interest cost, the sector was able to post a 7.6 percent growth in profits.

Lack of fuel hit PLF

Availability of coal continues to remain a big issue as highlighted by companies like NTPC, which reported a shortage of coal at 4 of its plants. A part of this was due to non-availability of railway rakes and logistic issues, which is hurting evacuation of coal. NTPC reported a marginal 7.4 percent year-on-year growth in sales. However, profits saw a marginal 0.3 percent decline as a result of higher depreciation and interest cost from recently added capacities. The management is hopeful of the coal issue being sorted out and expects better profitability in the current fiscal.

Adani Power faced similar issues as its plant at Tiroda and Kawai suffered from lack of fuel availability. During Q4 FY18, generation volumes fell 50 percent, including impact of Mundra shutdown. This also reflected in its financials, with revenue down 9 percent in FY18.

Lack of fuel availability further compounded problems for companies like JSW Energy whose earnings were squeezed by higher fuel cost (buying coal from the market) and pricing pressures. The company, which earns a large part of its revenue from the merchant power market, saw pressure on realisations leading to a 2.6 percent drop in revenue. This coupled with cost pressure (total cost up 7 percent) led to a 7 percent decline in operating profit.

Despite a challenging environment, companies like Tata Power continue to report better profitability as a result of cost-cutting and divesting some of its non-core or loss-making businesses. That apart, higher international coal prices have boosted profitability of the coal business. During FY18, led by gains from exceptional transactions, the company reported a net profit of Rs 1,197 crore as against a loss of Rs 129 crore in FY17.

Companies like CESC, which have PPAs and fuel linkages in place, are better placed on the generation front, moving up 19 percent YoY in Q4 and 5 percent in FY18. The company’s PLF increased to 59 percent in FY18 as against 56 percent in FY17.

Be selective: More pain in store

While coal supplies are improving, backed by government’s initiatives such as supply of coal under “Shakti”, companies continue to face headwinds on various fronts. During April and May, all India generation grew by a mere 2 percent YoY, which indicates that growth is still not visible.

Within the power sector, we are more constructive about state-run utilities such as NTPC, which has a stable cash flow stream, capacity addition and low regulatory risk. It is trading at 1.1 times its FY20 estimated book value, which is quite reasonable.