JM Financial in its note on utilities said a reduction in GST rates on renewable energy (RE) equipment from 12 per cent to 5 per cent is structurally positive as it reduces the capex requirement for developers, thereby supporting lower tariffs in auctions. That said a ‘change in law’ may prompt discoms to seek revision in tariff in many of the underconstruction projects, particularly in 50GW that were awarded recently. For RE developers, this will be one more challenge in addition to many recent ones like ISTS waiver, curtailment, connectivity and localisation (PV cell and wind turbine), JM Financial said adding that the RE capacity addition to hover around 30-35GW in FY25 and FY26 against government’s aspiration of 50GW per year.
“Possibilities of petitions for tariff revision may be one more challenge RE developers will face in addition to many recent ones like ISTS waiver, curtailment and, localisation (PV cell and wind turbine). Within our coverage, beneficiaries include ACME Solar (target price: Rs 330, Hold), JSW Energy (target price: Rs 726 , Buy), Torrent Power (target price: Rs 1349, Hold), NTPC (target price: Rs 391, Buy) and Tata Power (target price: Rs 383, Buy),” JM Financial said.
The domestic brokerage said an increase in GST on coal from 5 per cent to 18 per cent, accompanied by the abolition of the compensation cess, is positive for Coal India (target price: Rs 372, Hold). For generators such as NTPC (target price: Rs 391, Buy), the impact is neutral since the higher GST rate merely replaces the compensation cess, leaving overall coal costs largely unchanged.
JM Financial said discoms are likely to benefit from the reduction in GST rates, as the change can be interpreted as a “change in law” event under regulatory provisions. This precedent was established in 2021 when GST on RE was increased from 5 per cent to 12 per cent, and CERC ruled in favour of developers such as Beempow Energy, granting compensation to restore them to their pre-event financial position. Applying the same principle, the current GST cut should work in reverse, with discoms expected to seek benefit of lower capex through reduced tariffs in under-construction projects, JM said.
The broking firm said a typical FDRE power project comprises 70 per cent goods and 30 per cent services, which were previously subject to GST rates of 12 per cent and 18 per cent, leading to a composite GST of 13.8 per cent. With the current changes, the rate on goods has dropped from 12 per cent to 5 per cent, while the service rate remains at 18 per cent; lowering the overall GST rate from 13.8 per cent to 8.9 per cent, it said.
“For instance, for a 320 MW FDRE project, costs decreases from Rs 4,750 crore to Rs 4,440 crore, and the GST liability reduces from Rs 490 crore to Rs 220 crore, resulting in a tariff reduction of Re 0.30 per unit (from Rs 4.5 per unit to Rs 4.2 per unit),” it said.
At present, 1,58,450 MW of RE projects (74,150MW Solar, 30,080MW wind and 53,750MW hybrid) are under construction. Out of these, around 50GW was awarded recently and must be or will soon come under construction. Discoms may seek revision in tariff in many of these projects, bringing one more challenge for RE developers in addition to recent ones like ISTS waiver, curtailment and, localisation (PV cell and wind turbine), JM said.
Here’s the complete list of stocks under JM coverage, including Suzlon Energy, NHPC, SJVN, CESC, IEX and Torrent Power and JM Financial’s target prices on them:
Disclaimer: Business Today provides stock market news for informational purposes only and should not be construed as investment advice. Readers are encouraged to consult with a qualified financial advisor before making any investment decisions.