Motilal Oswal upbeat on NTPC, Power Grid

PMO’s focus on “fuelling” all projects; consensus on coal price pooling inevitable: Fuel supply and power distribution are two key issues affecting the Utilities sector. Improvement on these two counts alone can revive interest/investment in the sector. Hence, PMO (Prime Minister’s office) is focusing on (1) “fuelling” all projects in the system (to meet PLF of at least 85%), and also (2) reviving discoms. Coal supply issue can be mitigated through imports, which would necessitate coal price pooling a blended price for all projects across the country. This may lead to several winners/losers, possible apprehension from few States, etc, which would have to be overlooked for a robust sector. Improvement in gas supply may not be as easy to sort out given EGoM’s involvement, low domestic availability and higher cost of LNG imports. Current power tariffs are not feasible and separate peaking power tariff system is possibly the only solution.

Restructuring of discoms will drive demand Growth: The debt restructuring plan for discoms is awaiting cabinet nod. The plan is intended to ease discoms’ cash flow commitment, given that it proposes 50% debt be taken over by States and moratorium worked out for the balance debt. This, along with tariff hike, would mean improved cash flow, leading to higher power demand.

Developer with captive coal block to share the benefit of low cost: Developers with captive coal block would have to pass on the benefit to consumer, as more domestic availability of coal would mean lower burden to consumer, and less reliance on imported coal. Recent views aired by authorities suggest that developers with captive coal blocks would be asked to compulsorily participate in competitive bidding, and if not, face cancellation of coal blocks with retrospective effect. This is however contingent on start of new round of bidding from discoms.

OUR VIEW- Limited option with authorities; yet smooth transition unlikely There are very limited options with authorities "given consequences on financial sector", and little space for any bold steps other than support all the capacity that is added/being added. Radical changes like coal price pooling could face challenges given involvement of various States (resource rich states may not agree as they might be at disadvantage). Also, certain class of developers (e.g. NTPC) may not be entirely in agreement. Thus, there remains limited visibility on possible outcome, while the attention from highest authorities is comforting. We believe, in any event, CPSUs like NTPC and Power Grid are better placed and remain positive.

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