Shares of state-run power utility NTPC Ltd jumped nearly 7% on Wednesday to close at around Rs229. The stock reacted to media reports about the government’s intent to allow power producers to sell a part of the power generated in the open market. This will translate into an earnings expansion for NTPC in the coming years.
Power generating companies typically have to sell power through the state electricity board grids at fixed rates. Under the open access, the company will be able to sell power at market determined rates, which are at present higher than the fixed tariffs. This will lead to revenue and profit expansion in generating companies.
The cabinet proposal, when cleared, will permit companies to sell in the open market around 25% of a company’s unallocated power generation capacity, which is 15% at market-determined rates. That’s around 4% of a company’s total power generation.
What does this mean for NTPC? It has a capacity to generate nearly 30,000MW per annum. According to analysts, at the present generation level of around 27,000MW, the company will be able to sell 1,000-1,100MW every year in the market.
Besides, reports indicate that the government may also allow Central power utilities such as NTPC to sell as much as 50% of the unallocated quota in the open markets for new projects. If that happens, NTPC will gain because it has substantial new projects lined up.
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Analysts point out, though, that generation companies will have to contend with the vagaries of demand and supply, which could lead to seasonal fluctuations in tariffs. A report by Motilal Oswal Financial Services Ltd states that the short-term trading price at November-end was at around Rs2.37 per unit, much lower than around Rs10 in August this year. Also, while the open-market tariffs will be favourable for the next 12-18 months due to the power deficit, it remains to be seen if companies can command a good market rate thereafter.
An analyst from a leading Mumbai-based securities firm states that for NTPC “open access could lead to a 10% expansion in earnings from fiscal 2008-09, when it was around Rs10 per share”. In the absence of this accretion, the growth rate in earnings is expected to be flat for fiscal 2011. That should augur well for NTPC, given that it has plans for an estimated Rs8,500 crore follow-on public offer within the first three months of 2010.
Graphics Naveen Kumar Saini / Mint
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