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Power stocks are trading mixed at the bourses today on the back of Central Electricity Regulatory Commission (CERC) orders.
While on one hand the power sector regulator has 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 tariff regulations for FY15-19 that have further tightened the operating norms for power generating companies.
The S&P BSE Power index tripped nearly 1.5% in intra-day deals, as compared to 0.3% rise in the benchmark indices – the S&P BSE Sensex and the CNX Nifty.
Among individual stocks, NTPC was the top loser that lost nearly 11% to its five-year low in intra-day deals on the back of the final tariff regulation for FY15 – 19 announced by the CERC that are being seen as a negative for the company. JP Power Ventures, Power Grid Corporation and Reliance Infra were some of the other losers.
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% (-7.3% in draft) to 15.8% in FY15 (23.9% in FY14), as against our expectation of RoE gain of 2 – 2.5%. These regulations impact our FY15 earnings for NTPC by about 14-15%, for PGCIL by about 2-3%, for SJVN by about 3 – 4%, and for NHPC by about 1 – 2%. As a result we expect NTPC to react negatively. However, we expect PGCIL to react a positively and do not expect much movement from NHPC and SJVN since much of the impact of the regulations is already factored in.”
“PGCIL remains our preferred pick on back of strong capitalisation led EPS growth of 15- 16% over next two – three years versus no growth in NTPC. Further, given the negative impact of regulations we may see de-rating of NTPC, leading to lower levels. Hence we would suggest shifting to PGCIL,” they add.
Add Bharat Parekh and Jonas Bhutta, analysts tracking the sector with Bank of America Merrill Lynch (BofA–ML): “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 across-the-board cut in its incentives, Power Grid would also hit on increase in normative Transmission Availability Factor (TAF) by 100 – 400 bps (basis points). We maintain our non-consensus under-perform rating on both NTPC and Power Grid.
Powering ahead
As regards Tata Power, analysts suggest that the bailout package will result in electricity tariffs increasing by 52 paise per unit for the current fiscal across states such as Gujarat, Maharashtra, Haryana, Punjab and Rajasthan.
“The increase in tariff is ahead of market estimates which was expecting between 22-30 paise tariff hike. However, it is lower than the 67 paise hike petitioned by Tata Power. The tariff hike may prevent the project from turning into a NPA (non-performing asset). We continue to be positive on the stock and recommend BUY with an enhanced price of Rs 88 per share,” said Sanjeev Zarbade, vice-president – private client group (PCG) research at Kotak Securities.
Shankar.K and Santosh Hiredesai of Edelweiss Research believe that the current order pertaining to Tata Power could get challenged / contested at the higher judicial bodies and could delay the finalisation of the compensatory tariff process. “We are of the view that a stay on the CERC order is not likely. Hence, we upgrade to ‘BUY’ from ‘HOLD’ and maintain ‘sector performer’ rating with revised target price of Rs 99/share,” they suggest.
However, 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 tariff regulation. Mumbai and Delhi have announced tariff cuts ahead of the general elections. One must realise that the higher tariff has now to be passed on to the consumers in an election year. So if you take a two-year view, someone has actually come out in defence of the power companies. It will still take a lot of time before things become clear. 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.
