Profit upgrades for NTPC, Power Grid on new power tariffs regulations

Besides stable regulated returns, NTPC will get some respite on coal, O&M under-recoveries

The Central Electricity Regulatory Commission’s (CERC’s) final regulations on power tariffs for FY19-24 comes as a respite for power utilities, with brokerages upgrading net profit estimates for players such as NTPC and Power Grid. The tariffs have a significant bearing on the ability of power companies to earn a stipulated return.

While the Street was expecting a significant dilution of regulated returns for the next five-year period, they were being left unchanged at 15.5 per cent for both generation and transmission was a key positive. A stable return on equity (RoE) is looked at as a key driver for earnings of the firms.

The regulator also has dropped the proposal for a reduction in regulated equity for plants beyond their useful life, which is another trigger for the intra-day rally in the stocks.

Besides the regulator has provided some respite on other fronts such as under-recoveries for coal and operation & maintenance (O&M).  However, there has been tightening of norms on working capital that may partially take away some of the benefits.

 

Among other positives is the regulator retaining compensation of 85 kcal/kg for loss of fuel during storage. Lack of NTPC’s coal-handling loss pass-through was a major regulatory headwind earlier. Analysts say that NTPC has already experienced RoE under-recovery to the tune of 240-280 basis points for eight quarters, and will suffer for another quarter (March’19 quarter) before it corrects during FY19-24.

In addition, with security expenses being separated, benefits are also seen in operations and maintenance under-recoveries. Analysts say the O&M expenses allowed for FY20 are 8-10 per cent higher compared to FY19 to take care of wage hikes. CLSA analysts say that the coal-loss pass-through, the carve-out of security expenses, higher special allowances and the O&M expenses were key in neutralising the tightening of norms. The regulator has tightened norms on working capital with reductions in coal inventory days while linking working capital rate to a dynamic rate (SBI MCLR).

Overall, while the impact of some amendments is difficult to quantify, analysts at Edelweiss estimate that the norms would have a positive impact of 90 basis points (bps) on NTPC post-tax RoE. Analysts at CLSA, however, see RoE expansion by 250 bps over FY19-21. They have raised Power Grids’ earnings by 6 per cent for FY20 to factor in the new norms.