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CERC shocker: Power stocks plunge; NTPC, Power Grid will be hit most, say brokerages

NEW DELHI: Analysts at top brokerage firms are of the view that stricter norms and sharing incentives proposed by CERC are likely to hit independent power producers; and government companies such as NTPC, Power Grid the most.

Reacting to the news, most power stocks plunged in trade on Tuesday with NTPCBSE 2.83 % leading the decline. The stock was the top loser on both Sensex and Nifty indices, falling as much as 11.9 per cent in intraday trade.

The Central Electricity Regulatory Commission (CERC) has issued draft regulations which proposed stringent tariff regulations for five years beginning 2014-19 (or tariff determination during FY15-19).

The proposed tariff regulations for 2014-19 do not allow grossing up of taxes and mandate companies to share financial gains with consumers. 

The Central electricity regulator (CERC) has released draft regulations for the new regulatory regime (FY15-19) in which the regulated ROE has been kept unchanged at 15.5 per cent, but as expected there has been a further tightening of efficiency norms/tax arbitrages.

However, a penalty of 1 per cent to the ROE has been introduced if the commercialization in declared without the required telemetry and communication systems up to the load dispatch centre.

"These are draft guidelines and if India is going to improve its growth and obviously power is going to be a part of that equation where huge investments are needed, I will be surprised if the full form of this actually becomes a reality," said Andrew Holland, CEO, Ambit Investment Advisors Pvt. Ltd.

"I don't think you can start limiting ROEs in a sector which is starving of funds at the moment. Therefore, unless you make it attractive enough, no one is going to invest, that is for sure," he added.

Holland is of the view that these are just draft guidelines and I would not read too much into them right at the moment. 

However, experts are of the view that proposed guidelines if approved will hit earnings of thermal companies such as NTPC by up to 7-8 per cent and Power Grid Corp by up to 3 per cent if the regulations proposed by the Central Electricity Regulatory Commission (CERC) are through. 

"From a stock specific view, the impact of proposed regulations is 7-8 per cent on earnings for NTPC compared to marginal 2-3 per cent for Power Grid," Barclays said in a report. The global investment bank is 'overweight' on both the stocks. 

"Due to marginal increase in normative annual transmission availability factor (from 98% to 99%) and reduction in escalation rates for operation and maintenance, we expect an impact of 2-3% on the profitability of Power Grid," added the report. 

The base ROE has been kept unchanged at 15.5 per cent (post-tax) and O&M escalation has been increased to 6.35 per cent. CERC has proposed to share incentives on operational parameters like heat rate with SEBs in 3:1 and linked incentives to PLF or plant load factor. 

This proposal, if it goes through, is a negative for IPPs, in our view, Elara Securities said in a report. Our sensitivity analysis suggests earnings of NTPC and Power Grid would fall by 9 per cent and 3 per cent in FY15E, respectively, if draft proposals are notified, added the report. 

The regulator has proposed to link incentive computation for thermal plants to plant load factor (PLF) over FY15-19 (a system similar to FY05-09 regulations) as compared to availability (FY10-14).

Elara Securities is of the view that this is a negative for NTPC, as PLF is subjected to demand fluctuations by SEBs and fuel supply variations. The global brokerage firm is of the view that NTPC ROE can decline by 97bps. 

There is a public hearing on January 15, 2014, then a final notification by March and applicable from April.


Source: http://articles.economictimes.indiatimes.com/2013-12-10/news/45035522_1_central-electricity-regulatory-commission-cerc-power-grid-corp

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