Recovery of costs key to survival of power cos: Experts

Following the NHAI's initiative to give a fillip to road sector, hopes of reviving the ailing power companies have surfaced. The NHAI has said all 39 projects that are under way will be considered for backloading of premiums. Will the move on infrastructure extend to accommodate proposal to hike power tariffs?

 

Pramod Deo, former chairperson of CERC; and Abhineet Anand, Capital Goods Analyst, Quant Capital share their views on the sector.

Also Read: CERC may raise Tata Power tariff by 60 paise: IIFL

The Deepak Parekh panel has already recommended a compensatory tariff of 45-55 paise for Tata Power's 4,000 MW Mundra plant and a tariff increase to the tune of 60 paise for Adani Power's 4,620 MW Mundra plant. But state distribution companies are yet to agree.

Below is the verbatim transcript of Pramod Deo & Abhineet Anand's interview on CNBC-TV18

Q: Deepak Parekh Committee recommendations are prospective or retrospective?

Deo: Compensatory tariff does not mean that it has to be retrospective or prospective. You can work out the quantum, question will come that how do you recover. Obviously you cannot recover, from the past already it has been done so it will have to be recovered in the future. One will have to see that the burden finally goes on to the consumer. So how do you really restructure that, it is something which will be needed.

Q: CERC had returned the recommendations of the Deepak Parekh Committee because it was not signed by all stake holders and they have given the states four weeks to come back. When you say they have to come back to you did the CERC mean that the cabinets also should approve because after all a raising of power tariff even if the Discoms agreed as state holders, could be stopped by the state governments? So are you all asking for state governments also to sign on the recommendations?

Deo: What happens is in state governments there are conduct of business regulations so it will depend on whether decision will be taken by the entire cabinet or there will be a cabinet committee, it depends on that. What is required is when the committee met, there were senior officers from the state governments and some of them were also Discom MDs. They said we cannot sign it unless we get governments okay and for that the time has been given. So now it is for each state government according to their regulations to decide and come back. The whole idea was that if all parties agree then this compensatory tariff becomes something which has been agreed by all. And since it is in the interest of all it can be implemented.

Q: What have you made of the recommendations by the Deepak Parekh Committee and if accepted how much could it add both to Adani Power as well as Tata Power?

Anand: If it is added it is positive for both the stocks, more so for Tata Power. Tata Power is actually incurring around 50-60 paise/kWh loss. So as per media reports if the panel goes ahead with the recommendations and the states sign on that which is very important, a 50 paise/kWh could have serious impact on the earnings of Tata Power. So the value that can get added could range between Rs 5-10 to as high as Rs 25 but that depends on the quantum of the raise.

Also the fact is that the states need to actually sign on that and it is not the Discoms because the burden on one state could be very high. If you look into the size of 50 paisa/kWh on a 4,000 MW project which Mundra, Tata Power and also Adani Power, so it would be a huge amount say Rs 600-700 crore from Gujarat. Similar numbers could come from Haryana and Maharashtra. So states actually need to chip in for this. Although the plus point in the whole process is that if you look into the power pricing still even though this 50 paise gets added into Tata Powers present tariff that they are able to recover, that is still lower than a number of high cost power that is being generated in the country.

Q: At this point would you buy the power companies?

Anand: For Tata Power base case without Mundra, any escalation our target is around Rs 70. The stock is presently around Rs 80-85 so to our calculation the stock is actually factoring in at least 20-30 paise hike that is already built in. So the risk return at this point at Rs 85 doesn’t seem to be very favourable for Tata Power. At Rs 70 when it had crashed last quarter it was more favourable because at around Rs 70 Mundra was valid at a high negative value that we have around Rs 27-30 on a negative side and was factoring in zero compensatory tariff, but I would say we would not be very eager to enter this stock at around Rs 85-90 because what is left is may be around 10 percent but at the same time there would be state’s non-ability to pay or some amount of litigation which can again drag the stock down. So the better price to enter Tata power is again at around Rs 70-75 where you actually factor in the risk.