Moneycontrol Bureau
Shares of
NTPC, the government-owned power generation company, plunged more than 9 percent in early trade on Tuesday after the Central Electricity Regulatory Commission (CERC) released draft regulations for power generation companies.
The final regulations -- which would decide power tariffs for FY2014-2019 and are expected to impact regulated power generating and transmission companies like NTPC,
NHPC,
Sutlej Jal Vidyut Nigam and
Torrent Power -- will be finalized after feedback from industry players early next year.
No tax arbitrage for NTPCAmong key highlights of the draft is a proposal to remove a tax arbitrage for power generator NTPC.
Analysts said the proposal to remove the tax arbitrage would negatively impact the power generator's earnings -- which used to earn about Rs 500 crore yearly, thanks to the earlier regulation.
“NTPC has been earning about 25% post-tax return on equity. If the proposed norms go through in totality, it could shave off 6-7% of the firm’s FY15 earnings,” Abhineet Anand, Power Analyst, Quant Capital, told CNBC-TV18 in an interview.
Reacting to the development, NTPC said it was studying the draft proposals, which “prima facie appeared positive”.
It further sought to assure investors of “continued returns” even as the stock slid sharply downward immediately in reaction to the news.
At 13:20 hours IST, the stock was trading at Rs 135.5, down 11.60 percent amid heavy volumes on the BSE.
Other key proposalsThe draft guidelines proposed to maintain the assured RoE at the existing rate of 15.5% and outlined a reversion to an earlier “plant load factor” incentive model from the coal-availability model where companies would earn Rs 0.50/kW for companies operating over 85% load factor.
Anand said the new structure was unlikely to be favourable for companies considering the load factor was only 83 percent for NTPC in FY13. "Given the slowness in GDP growth, if companies are unable to keep production over 85 percent PLF, this would result in another 2-3 percent hit towards loss of earnings."
“The change of the structure from availability to production puts the onus on the generators, which to me may be slightly harsh as the inability of the distributors to buy power also falls on them,” said Murtuza Arsiwalla of Kotak Institutional Equities. “What the regulator appears to have done is it has looked at the past performance of NTPC’s operational parameters and used it as a benchmark, which limits room for earnings going forward.”
Power Grid was down over 3 percent in early trade, but Anand of Quant Capital said he did not see a major negative impact on the company’s earnings.
Norms for operating and maintenance (O&M) expenses were also maintained, instead of easing them as was expected. NTPC’s under-recoveries for O&M stand at about Rs 1,000 crore.
“NTPC was earning high return on equity driven by the tax arbitrage and the previous incentive structure,” Revati Kasture, Head of Research, CARE Ratings, told CNBC, adding, “The new norms are likely to impact RoE going forward.”
No bounceback seen for NTPC?“If the draft guidelines are taken at face value, the impact on earnings could be as high as 8-10 percent, which is about the same the stock has fallen,” Arsiwalla said. “To my mind, the stock is likely to stay here till such point there is further clarity on whether the regulator will take a softer stance, which will come over the next month or two.”
“However, given past experience, the regulator tends to soften its stance as it moves towards finalizing the guidelines. So maybe, over the next few months, you could see some retracement in the stock price if further clarity emerges,” Arsiwalla added.
Leading brokerage houses such as CLSA, Barclays and Morgan Stanley came out with reports saying earnings could be hit between 4 and 8 percent and that they did not expect NTPC to earn additional incentive in the new structure.
The firms said they had already priced in elimination of the tax arbitrage in their fair value models and did not foresee major downgrades to the stock.
