NTPC share price: Motilal Oswal recommends BUY with target price Rs 141

The Ministry of Power (MoP) has issued a guideline enabling DISCOMs to exit power purchase agreements (PPAs) on completion of 25 years. Each state/DISCOM can take a call on relinquishment based on demand and supply. This in turn can pose a risk to some of NTPC’s projects in the near term. Motilal Oswal recommends buy with target price on NTPC is Rs 141. NTPC share price today is Rs 103, down Rs 3 or 2.8%.

NTPC’s projects, which have currently completed 25 years, were signed in the form of a bulk power supply agreement (BPSA). Motilal Oswal interaction with the management suggests that DISCOMs cannot cherry-pick projects to let go and will have to relinquish other projects (with lower tariffs) covered under such an agreement.

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Motilal Oswal awaits further clarity on the implementation of the above guideline. When implemented, this poses a risk to the company’s earnings as it would threaten its regulated equity and related fixed cost (FC) recoveries. Post relinquishment, NTPC can choose to tie up a separate contract or sell in the merchant market. Given the high variable cost in some of these projects, viability is a concern. While individual DISCOMs would take their own call, Delhi DISCOMs could exercise this option given their significant tie up to NTPC’s Dadri plant.

MoP enables exit of a PPA after 25 years:

The MoP’s guideline has enabled DISCOMs to relinquish their share of power from central government stations (CGS) after 25 years/the specified PPA period. States that decide to relinquish this power will not be allowed to buy back the same under similar PPA conditions.

As per the guideline, for a DISCOM to relinquish such a PPA, they will have to:

a)     secure approval of the state regulatory commission

b)    provide six months advance notice for relinquishment

c)     clear any past dues associated with the same

Post relinquishment, the generator will be allowed to tie up with other DISCOMs or sell power on the exchanges.

NTPC’s projects, which have recently completed 25 years, were signed in the form of a BPSA – combining a set of projects. As per our interaction with the management, DISCOMs cannot cherry-pick projects to relinquish and will have to let go of other projects (with lower tariffs) covered under such an agreement.

Despite the above clause, we see a risk to the relinquishment of some PPAs. NTPC’s non-pit head coal- and gas-based plants are vulnerable (refer Exhibit 1) given their higher tariffs. Delhi DISCOMs could possibly exercise this option given their large tie up to NTPC’s coal-based Dadri plant (refer Exhibit 2), with a lower share being allocated to cheaper plants. The same could impact our FY22E/FY23E EPS by 3-4%.

Assessing the impact of the guideline at this stage is difficult as we await details on the above matter along with the possible measures NTPC can take to reduce FC under-recoveries in case of relinquishment.

The guideline also lacks clarity in terms of:

a)     coal allocation post relinquishment of the PPA

b)    recovery of FGD-related capex incurred for relinquished plants