Why did NTPC shares drop 3% despite strong Q2 performance?

Shares of NTPC, India’s largest integrated power utility, experienced a 3% drop on October 25, 2024, despite delivering better-than-expected results for the quarter ending September 30, 2024. Although the company’s earnings surpassed Street estimates, the stock price reaction surprised many. Let’s explore the factors behind the decline and what this means for share market investment.

NTPC Q2 results: A closer look

In Q2 FY25, NTPC reported a 14% year-on-year (YoY) increase in consolidated net profit, reaching ₹5,380 crore. This growth came despite a marginal dip in revenue from operations, which fell slightly to ₹44,696 crore for the quarter. The positive results prompted the board to approve an interim dividend of ₹2.5 per share, reflecting the company’s confidence in its ongoing financial strength.

Power generation and capacity utilisation

The power utility generated 220 billion units (BU) in the first half of FY25, compared to 212 BU in the same period the previous year. Standalone gross generation also improved to 186 BU in H1 FY25, up from 179 BU. However, the second quarter's gross electricity generation dipped to 88.46 BU from 90.30 BU a year ago.

Plant load factor (PLF), a measure of capacity utilisation for coal-based thermal power plants, dropped to 72.28% from 75.83% in Q2 FY24. Despite the fall in PLF, NTPC's coal stations still performed better than the national average of 70.63%, achieving a PLF of 76.31% for the first half of the fiscal year.

Why did NTPC shares fall after positive results?

At first glance, the fall in NTPC’s share price, despite outperforming expectations, may seem contradictory. Several factors could explain this decline:

• Revenue decline amid strong profits: While net profit saw a 14% jump, the revenue from operations dipped marginally, signalling potential concerns about the company’s future growth. Investors in share market investment often look for consistent revenue growth as a sign of a company's long-term viability.
• Decreased power generation in Q2: The decline in gross electricity generation from 90.30 BU in Q2 FY24 to 88.46 BU in Q2 FY25 could have raised concerns among investors. Additionally, the reduction in PLF indicates lower efficiency in utilising capacity, which might have contributed to the market’s negative response.
• Impact of market sentiment and profit booking: Despite the drop, NTPC’s stock has performed well over the past year, rising approximately 72%, far outpacing the Nifty’s 27% gain. Such strong growth often leads to profit booking, where investors sell off shares to lock in gains. This could be a factor influencing NTPC's share price movement, even in the face of solid Q2 results.

Growth in coal production and capacity expansion

One positive takeaway from the quarter was the rise in coal output from NTPC’s captive mines. Production increased to 9.03 MMT in Q2 FY25 from 5.59 MMT a year ago. For the first half of the fiscal year, the production rose to 18.67 MMT compared to 11.83 MMT previously. The domestic coal supply also improved slightly to 54.75 MMT during the quarter.

NTPC continued to expand its installed capacity, reaching 76,443 MW for the group in Q2 FY25, up from 73,824 MW in the previous year. The standalone capacity also grew to 59,168 MW from 57,838 MW, showcasing the company’s ongoing commitment to enhancing its power generation capabilities.

NTPC's stock performance amid market trends

At 9:26 am on October 25, NTPC shares were trading around 3% lower at ₹399 on the National Stock Exchange (NSE). The stock has risen roughly 29% year-to-date, significantly outperforming Nifty’s return of 12% during the same period. In the past 12 months, the company’s shares have surged by 72%, compared to Nifty’s 27% rise.

Investors involved in share market investment may see this price correction as a temporary blip, considering NTPC’s strong fundamentals and strategic growth in coal production and installed capacity. However, the market's mixed response to the Q2 results highlights the importance of not just beating earnings expectations but also sustaining positive revenue growth and operational efficiency.

What does this mean for share market investors?

For those interested in share market investment, NTPC's recent performance underscores the importance of looking beyond headline earnings results. Factors like revenue trends, operational efficiency (PLF), and market sentiment play crucial roles in influencing share prices.

The stock’s recent decline might offer a potential entry point for long-term investors who believe in the company’s growth story and its role in meeting India’s power requirements. However, as with any share market investment, it's advisable to monitor the company’s future performance closely, particularly in areas such as revenue growth and capacity utilisation.

Conclusion

NTPC’s 3% drop in share price despite Q2 results beating Street estimates serves as a reminder of the complexities involved in share market investment. While net profit growth and dividend payouts signal financial strength, factors like revenue decline and decreased power generation can impact market sentiment. As India’s largest power utility, NTPC remains a key player in the energy sector, and its future developments will continue to be of interest to investors seeking opportunities in the share market.

By considering both the company's financials and broader market trends, investors can make more informed decisions about their share market investment strategies.