What will make the Rajasthan acquisition tick for NTPC?

A timely commissioning of projects under construction and proof that NTPC is extracting the intended benefits from the Chhabra plant will add to investor confidence


The Chhabra plant has power purchasing agreements with Rajasthan distribution companies on a cost-plus tariff, which is crucial fro NTPC, considering that there is a paucity of long-term power-purchasing agreements in India  as many companies are struggling to find customers.
The Chhabra plant has power purchasing agreements with Rajasthan distribution companies on a cost-plus tariff, which is crucial fro NTPC, considering that there is a paucity of long-term power-purchasing agreements in India as many companies are struggling to find customers.

Shares of NTPC Ltd hit a new 52-week high on Friday before closing lower.

They had surged on Thursday after the company said it signed a non-binding agreement to buy stage-I and II of the Chhabra thermal power plant from the Rajasthan government.

Stage I constitutes a 1,000-megawatt (MW) operating plant, while Stage II has 1,320MW under construction.

Apart from capacities, NTPC did not divulge details such as price or valuation.

Still, the acquisition makes sense, not least because of the diminishing growth opportunities in conventional energy.

According to analysts, the Chhabra plant has power purchasing agreements with Rajasthan distribution companies on a cost-plus tariff.

This is crucial, considering that there is a paucity of long-term power-purchasing agreements in India right now.

Many companies are struggling to find customers.

So, the acquisition of such a large regulated capacity will augur well for NTPC. Regulated capacities ensure minimum returns, limiting downside risks.

But such opportunities come at a price, and there is no clarity on this.

According to Nomura Research, the Rajasthan utility’s annual report pegged the 1,000MW plant’s project cost at Rs5,850 crore. Against this, the regulator is said to have approved a project cost of Rs5,010 crore. So, it would be a good deal if NTPC buys the plant at around book value or not more than Rs6 crore per MW, Nomura reasons.

To compare with deals of similar size, last year, JSW Energy Ltd agreed to pay Rs6.5 crore per MW for a 1,000-MW plant if the seller secures fuel supplies and the buyer of electricity.

Nomura expects its earnings estimates for NTPC to rise marginally for the next two fiscal years, if the plant generates the stipulated return on equity.

But these estimates are not watertight. An analyst at another broking firm points out that it all depends on the kind of value addition NTPC does to the plant.

As can be seen in the accompanying chart, the Chhabra plant has shown inconsistent performance.

The utilization levels have not been consistent and lagged NTPC’s levels.

Given the company’s expertise, analysts expect NTPC to improve efficiency, extracting better return ratios. NTPC said as much in its statement.

The optimism is partly reflected in the share price. The stock has gained 19% in the past year on steady earnings and guided for strong capacity addition-led growth.

Though valuations at around 1.4 times one-year-forward price-to-book value are not expensive, a timely commissioning of projects under construction and proof that NTPC is extracting the intended benefits from the Chhabra plant will add to investor confidence.

“In our view, improved visibility of captive coal access and a potential 33% capacity rise in the next three years will finally boost earnings growth and return on equity,” Nomura adds.

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