Don't dump Delhi power discoms

Market experts believe it is unlikely the new govt will be able to take irrational steps and, hence, investors should wait for further cues

In recent days as speculation gained ground and exit polls indicated an Aam Aadmi Party victory in Delhi, stocks of Reliance Infrastructure and Tata Power that operate power distribution companies (discoms) in the capital came under selling pressure. Since last Wednesday, Reliance Infra is down 15 per cent and Tata Power by nine per cent.

Now, with AAP in control of Delhi, there is apprehension about their prospects. For, Arvind Kejriwal, the chief minister-designate, has promised to go ahead with the audit of these companies' operations, beside taking measures to reduce power rates and to enhance competitive intensity.

So, should investors sell their holdings in these companies? No, say market experts; don't act in haste.

Says Deven Choksey, managing director, KR Choksey Securities, "AAP's earlier action of giving freebies and promises has had a very dampening impact on investment sentiment. Having learnt from the past, one can hope they overcome these. As of now, we have advised investors to wait and watch."

Another expert, a head of research with a domestic brokerage, says: "Prima facie, the negatives are already in the share price of these companies, which have underperformed significantly in the past few months. So, the downside is very limited."

Sandeep Upadhyay, senior vice-president at Centrum Capital, says: "These stocks are down more because of overall subdued sentiment. From a long-term view, there is nothing much to worry, as the fundamentals of the sector are intact."

However, he adds, "For now, investors are likely to cautiously look at power companies in the distribution segment. People might draw analogies with the scams in the coal and telecom sectors and, hence, one might not see aggressive calls on the discom stocks. But in the long run, as we seek more clarity on the processes and systems followed in the sector, we could see re-rating."

In the interim, though, there could be bumps. India has seen regulatory and legal hurdles in the case of coal and in telecom spectrum as the Comptroller and Auditor General of India (CAG) had raised concern over potential loss to the exchequer, incorrect processes in allotments, etc, leading to a revamp of the system in these sectors. There is similar concern on various aspects of the power distribution business, especially costs. There have been allegations that some companies tend to gold-plate their capital costs as they earn a fixed return on their investments, leading to higher profits, something denied by the entities in question.

"Currently, what is being contested is the limited clarity on the functioning of discoms, especially in terms of their capital expenditure and quality of assets. The capex is not as standardised as in the generation business," says Upadhyay.

That is what perhaps AAP wants the CAG to audit-the cost these companies incur and the reasons behind rising rates. Financial audit of the Tata discom is already underway by the authorities, said an expert.

However, during the transition period when rules and processes were changed, the telecom and coal-user industries saw a lot of uncertainty, impacting investor sentiment. We could see something similar in the power sector, say experts.

However, this should ultimately lead to a positive and clean environment for all stakeholders-government, customers, companies, etc. For existing companies, however, if competition is enhanced by way of more discoms, they might have to iterate their margins accordingly, which could impact short-term profitability.

On fears about freebies or discounts, there is little reason for investors to worry, say experts.

"We understand that the dictates of freebies or discounted power tariff (rates) and water bill, would invite regulatory and legal action. Thus, it would be challenging for anyone to implement these, simply because it ignores economic rationale," says Choksey.

"The question is where AAP will source free or discounted power from? Power companies will surely not bear the loss. So, there's no reason to worry," says the research head quoted earlier.

It is not that the companies in question do not have a record to point to on improving the power situation in Delhi. The bsesdelhi.com website says, "From a high of 63.1 per cent AT&C (transmission & distribution) losses in the BYPL (BSES Yamuna Power) area in 2002, the losses have come down to 15.7 per cent in FY13 (provisional figures). Similarly, in the BRPL (BSES Rajdhani) area, AT&C losses have been reduced from 51.54 per cent to 17.12 per cent in FY13."

The case with the Tata Power-controlled discom is equally good. And, this is despite the discoms having yet to recover Rs 27,000 crore of arrears (or regulated assets) from customers.

For Reliance Infra investors, since the company had already lowered its holding in the two discoms (BYPL and BRPL) from 49 per cent to 28.82 per cent around the second quarter of this year, the exposure is relatively lower. Tata Power owns 51 per cent in Tata Power Delhi Distribution Ltd (TPDDL). The Delhi government holds 49 per cent in each of the three discoms.

Apart from improving the quality of power in Delhi, the discoms have also brought into the system many unbilled customers, thereby improving their financials. For the December 2014 quarter, for instance, TPDDL saw its revenue increase 10.1 per cent to Rs 1,637 crore while net profit was up 25.3 per cent to Rs 109 crore.

And, any change in rates is decided by the statutory regulator, the Delhi Electricity Regulatory Commission, after checking various details regarding costs, etc.