20% tariff cut to hurt sector, hold Tata Power: Antique

Below is the verbatim transcript of Rahul Modi's interview on CNBC-TV18

Q: We understand that because Mumbai is out of the ambit, some of these companies like Reliance Infrastructure and Tata Power will not be impacted but what is your understanding of this power tariff cut in Maharashtra and how it could impact some of the companies?

A: This is a big negative development in a power space. What we see is that the FRP had gained momentum in the last six-eight months and as per the FRP, the dependence of these distribution companies (DISCOMs) on banks funding had reduced substantially. So now with Maharashtra cutting 20 percent the burden is up to Rs 7,200 crore as mentioned by the Chief Minister. Along with that if you look at the financials of MSED (Maharashtra State Electricity Distribution) sales, they have incurred a loss of around Rs 800 crore last year. So clearly they are not financially capable of funding this. So obviously it is a big negative because it is going against the FRP, which looks at a tariff hike or adjustments towards the positive.

Q: This is quite apart from the listed stocks, it is more a general perspective question for you. The Chief Minister told us yesterday that the average cost of power for him is Rs 6 per unit. That kind of startled us because in the exchanges, you can get power at Rs 3 and Rs 3.50. In the worst of times, that is good for power companies, power has cost about Rs 5 per unit. Why would the average cost for Maharashtra be Rs 6 especially because they must have fairly depreciated power sources, power plants at least Mahagenco (Maharashtra generation company)?

A: What we are seeing is if you look at the merit order of MSEDCL, more than 60 percent consumption is done from older power purchase agreements (PPAs), which are at a bit of higher rates mainly because of Dabhol going off and cost of coal being higher. They are also importing. So if you look at the annual revenue requirements (ARRs), that is at Rs 6, what he said is completely correct but what we need to see is there are many additional charges that charge on the regulatory assets, fixed charges, which are there as a part of a bill. So that inflates the cost.

Q: It is double? An average cost on the exchange for a unit of power is Rs 3.50 today and the actual power for Maharashtra state Electricity Board (MSEB) or MSEDCL would be double? Rs 6 is that much the overheads that get added on?

A: If you look at the exchange prices, it has cooled off in the last one year because of demand destruction. But exchange power cannot be treated as base load power because the reliability of exchange power is not there. That is a major issue. So the exchange power can be used for the incremental power, which is required but not for the base load because power being a necessity and the nature of the commodity is such that the dependability has to be there.

Q: How much will all of this impact the ongoing price negotiation for many of these private power utilities, the likes of Tata Power etc and how do you approach these stocks today?

A: That is what concerns me. If you look at the CERC hearings going for Tata Power as well as Adani Power, what signals us is that it will now be incrementally very difficult for the DISCOMs to agree to a tariff hike that is completely my view because already they will be sharing a burden. The CM had said that part (subsidy) will be shared by MSEDCL and part will be shared by the state exchequer. So in such a case obviously if there is some scope to pass it on to the gencos, that might happen. We don’t know yet because the final CERC order is yet to come. I believe that at least in case of Tata Power, it can be challenged because two states, Haryana and Maharashtra which are buying from the Mundra UMPP have gone in for power cuts.

Q: So there could be a sentiment negative you are saying on Tata Power already?

A: At current prices in Tata Power I don’t know there is not much to lose but again sentimentally it is a very negative because you don’t know if the state government at any point in time is not able to fund the subsidy due to whatever reasons then who bears the brunt of that. It might come on to the banks, it might come on to DISCOMs, so anyone in the value chain can be hit. So we had a hold rating on Tata Power. We do not have a rating on Reliance Infrastructure, we maintain that. We will not jump the gun, shot and say that we will sell the stock but we will not be very bullish at least till elections are over.