Poor availability of coal has been a big overhang for the power sector in recent times. So, when Coal India’s board agreed to sign the fuel supply agreements (FSA) at 80 per cent of the acquired contractual quantity, shares of India’s largest power producer, NTPC, moved up four per cent on Thursday. Analysts say with Coal India’s board agreeing to guarantee 80 per cent of supply and the pool price of imported and domestic coal, there’s better visibility on fuel supply for India’s largest power producer.
Coal India’s announcement has come soon after the company announced better-than-expected first quarter numbers. Over the past week the stock rose eight per cent. NTPC is a key player in the power sector, with an installed capacity of 39 Gw, generating 28 per cent of the country’s total electricity. Analysts say the development gives clarity on fuel supply for NTPC’s 14 Gw capacity that is under construction, thereby mitigating some of the risks of lower profitability from these assets. ICICI Securities has a positive view on the company, given the better prospects of fuel availability. The brokerage says: “The reduced capacity addition target of 14 Gw of additional capacity has better fuel visibility, with Coal India agreeing to sign FSAs with 80 per cent supply assurance and higher penalty (quantum yet to be decided) and pooling of coal prices to equitably meet the shortfall of coal.”
Under the earlier FSAs, with supply assurance of 65 per cent and a weak penalty clause, NTPC would have found it difficult to recover its fixed costs. However, under the new terms, NTPC is better equipped. Of all the power producers, analysts believe NTPC is a safe bet because it faces lower risk on fuel prices, thanks to its long-term FSAs. According to Motilal Oswal, NTPC is among the best placed sector players, with regulated returns (lower risk on fuel cost/merchant prices), sizable fuel supply under long-term contract and payment mechanisms.
In addition, the Street is positive on the stock, as the company plans to foray into areas like coal mining, distribution, transmission, merchant sales and gas exploration. Analysts expect earnings to grow at a compounded annual 17 per cent over FY12-FY14. While the usual risks of project delays and land acquisition could also affect NTPC, for now analysts believe the company’s valuations and earnings are comfortable.