Power Analyst, Harshavardhan Dole of IIFL is hopeful that based on the Deepak Parekh panel recommendations, fuel under-recovery will be met by a tariff hike to a large extent. The recommendations include around 60 paise compensatory tariff hike for Tata Power. (Read More)
“If this kind of tariff increase is given to Tata Power then the annual losses, which are estimated to be around Rs 1,000 crore on a full year basis will surely get wiped out,” he says in an interview to CNBC-TV18.
However, he believes Adani Power might face difficulty in recovering its losses completely due to under-recovery in terms of fuel and severe escalation of capital cost under-recovery due to rupee/dollar depreciation.
With regards to specific stocks, Dole is bullish on Tata Power and recommends buying with a target price of Rs 100 for two years.
Below is the verbatim transcript of Harshavardhan Dole’s interview on CNBC-TV18
Q: Today there is Central Electricity Regulatory Commission (CERC) meeting with distribution companies (DISCOMs), do you believe tariff increase will come through for Tata Power and Adani?
A: I am quite hopeful that over the next couple of quarters, there will be some realignment of the tariff. There has been a substantial cost under recovery both in terms of fuel as well as capital cost and based on the recommendations by Deepak Parekh committee, there is a good chance that at least the fuel under-recovery for both these companies will be addressed to a large extent.
Q: What is the quantum of the tariff hike that you are expecting? If it happens, by how much will the losses come down for companies like Adani or Tata Power?
A: In case of Tata Power, the tariff increase is closer to about 60 paise before one factors in the benefits from the profit of coal mine and sell of surplus power. If this kind of tariff increase is given to Tata Power then the annual losses, which are estimated to be around Rs 1,000 crore on a full year basis will surely get wiped out and there will be some positive return on equity (ROE) that Tata Power will register. I am not hopeful whether ROE will be in the region of around 10-15 percent but it should be some positive number.
In case of Adani Power, there are two problems. One, they are incurring the under-recovery in terms of fuel, which is what the CERC and the Deepak Parekh committee are trying to work out and the other is in terms of the capital cost under-recovery because the capital cost is escalated severely due to rupee/dollar depreciation.
I am not sure in case of Adani Power just by virtue of the committee recommendations whether the entire losses will get wiped out but surely in case of Tata Power there is a hope that the under-recoveries which are largely on account of fuel will get addressed to a large extent.
Q: Do you see gas price getting pulled if CCEA meeting is called off or do you think that will happen and if it does, is it a seminal difference?
A: There is no denying if the gas prices are not rationalised particularly for sectors such as power these projects will remain stranded and virtually there will be no takers for the power, which will be generated out of these projects. Pulling is something which is quite logical but in case of coal, it has not worked through. So, it needs to be seen as to in which format the government controls the input prices for the gas based power projects.