Market View: CERC ruling for Adani Power

Adani approcahed the regulator to consider hike in power tariff after customers in Haryana and Gujarat declined to pay higher rates

Shares of power generation companies gained ground in morning deals after the Adani Power ruling from the power sector regulator, Central Electricity Regulatory Commission (CERC), on the issue of supply of electricity from its imported coal-based power project at Mundra in Gujarat.

The company had approached the regulator to consider increases in power tariffs after customers in Haryana and Gujarat declined to pay higher rates for the electricity generated from its imported coal-based plant in Gujarat.

Besides Adani, Tata Power has also approached the CERC to consider increase in its power tariffs after customers declined to pay higher rates for the electricity generated from its imported coal-based Mundra plant in Gujarat.

Stock impact

Given the development, most stocks from the power sector saw a huge jump, with Adani Power rallying up to 15% in morning deals to Rs 49.9 on heavy volumes on the Bombay Stock Exchange (BSE). Among the other stocks, Tata Power surged 6% to Rs 101, followed by JSW Energy (up 5%), while NHPC and Reliance Power gained 4% each intra-day, respectively.

Notes Rupesh Sankhe, analyst at Karvy Research in a note: “The power sector has been impacted by utilities facing lower system demand due to erratic purchase behaviour from state- owned DISCOMs as they look to contain their losses.”

As regards the CERC ruling on the Adani issue, Bhargav Buddhadev, an analyst at Ambit Capital says that the ruling was the precedence for the Gujarat & Haryana regulatory commissions to start hearing on Adani Power on tariff increases.

“The reason why they were not adhering to Adani Power petition was that they might fear that if we go ahead and give out a tariff hike then possibly CAG might question their preferential treatment. So, they were waiting for the CERC to give a go ahead, and today it has come through. Now, a committee will be set to decide the quantum and get back to CERC. This is surely a game changer for the industry as the current ruling challenges the tariff under Section 63A which mandated that power has to supplied at rates set in the original PPA.”

“We have a buy call on the power stocks with Tata Power and Adani among the top picks,” he adds. Karvy’s Sankhe, on the other hand, is bullish on Power Grid and NTPC.

Observes Gaurav Dua, head of research at Sharekhan: “I don’t think this is a ruling. What the CERC is effectively saying is that we can relook at the power purchase agreements, which are long-term contracts with fixed rates. But now that the coal prices have gone up and the dynamics of the power space has changed. So, CERC has allowed for a relook and nothing more as of now.”

“Personally, I don’t know on what basis they are going to hike it but viability is going to be one of the key factors in the relook. I wouldn’t say this is a game changer as it was expected that the power tariffs will be revised. Since the regulator has starting mentioning about it now, it’s more a sentiment changer. In the past we have seen State Electricity Boards (SEBs) make some tariff hikes, which will lead to some improvement in their financial conditions. So, over the 6 months to 2 years we will have number of steps to sort out issues in this sector,” he adds.