Advantage Tata Power, pain for NTPC

Tata Power surges 5%; NTPC slumps to five-year low

Power stocks reacted in a mixed way at the bourses on Monday, on the back of  separate orders by the Central Electricity Regulatory Commission (CERC). While the regulator upheld its earlier order of a bailout package to Tata Power for the electricity generated from its imported coal-based Mundra plant in Gujarat, it also announced its final rate norms for FY15-19 that have further tightened the operating norms for power generating companies. The S&P BSE Power index tripped 1.5 per cent as compared to a 0.5 per cent rise in the benchmark indices, the S&P BSE Sensex and the CNX Nifty.

For Tata Power, analysts suggest the bailout package will result in electricity rates rising 52 paise a unit for the current financial year across Gujarat, Maharashtra, Haryana, Punjab and Rajasthan. And, this will mean higher earnings for the company and better valuations for its stock.

“The increase in tariff (rate) is ahead of market estimates, which was expecting a 22-30 paise rate rise. However, it is lower than the 67-paise rise petitioned by Tata Power. The  increase may prevent the project from turning into a non-performing asset (NPA). We continue to be positive on the stock and recommend ‘Buy’ with an enhanced price of Rs 88 a share,” said Sanjeev Zarbade, vice-president, private client group research at Kotak Securities.

Shankar K and Santosh Hiredesai of Edelweiss Research believe the current order pertaining to Tata Power could get challenged/contested at the higher judicial bodies but they are not worried on this count. “We are of the view that a stay on the CERC order is not likely. Hence, we upgrade to ‘Buy’ and maintain the ‘sector performer’ rating with a revised target price of Rs 99 a share,” they suggest. However, some analysts are still cautious on the sector as a lot of clarity is required. While state governments are likely to contest CERC’s rate rise order for Tata Power, availability of coal among others still remains an issue.

Sonam Udasi, senior vice-president and head of research, IDBI Capital maintains a cautious view on this sector. “The sector has had a series of upheavals on the back of a number of orders related to rate regulation. Mumbai and Delhi have announced tariff cuts ahead of the general elections. One must realise that the higher tariff (of Tata Power's Mundra UMPP) has now to be passed on to the consumers in an election year. There are a lot of confusing signals being sent out and no one will prefer to invest in such a scenario. I am not yet convinced that we should change our stance to positive on power stocks. Though there is long-term value in NTPC, we still remain negative on the sector,” he says.

On NTPC, point out Amit Golchha and Anujay Jain, analysts tracking the sector with Emkay Global: “In our assessment, the final regulations impact NTPC’s core RoE (return on equity) further by -0.8 per cent to 15.8 per cent in FY15, as against our expectation of RoE gain of 2–2.5 per cent. These regulations impact our FY15 earnings for NTPC by about 14-15 per cent, for PGCIL by two-three per cent, for SJVN by three-four per cent, and for NHPC by one to two per cent. As a result, we expect NTPC to react negatively. However, we expect PGCIL to react positively and do not expect much movement from NHPC and SJVN since much of the regulations impact is already factored in.”

Add Bharat Parekh and Jonas Bhutta, analysts tracking the sector with Bank of America Merrill Lynch, “We see the cut in incentives not only as a structural decline in regulated RoEs but a de-rating catalyst. While NTPC would be worst hit due to an across-the-board cut in its incentives, Power Grid would also be hit on increase in the normative transmission availability factor by 100–400 bps. We maintain our non-consensus under-perform rating on both NTPC and Power Grid.”