Motilal Oswal Financial Services has recommended buying NTPC with target price of Rs 141 with upside of 33% in its report.

Commenting on the investment rationale, the broking firm said, 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.

NTPC's projects, which have currently completed 25 years, were signed in the form of a bulk power supply agreement (BPSA). Our 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.

We await 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."  

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