NTPC incentive unlikely under draft power rules: Quant

Abhineet Anand, Power Analyst, Quant Capital, spoke with CNBC-TV18 on the impact of the CERC draft regulations on NTPC and other power companies.

Below is a verbatim transcript of the interview.. Q1: Could you read through the draft CERC norms, there is one report which says that National Thermal Power Corporation (NTPC) is a beneficiary of incentives structure, which have been tightened in the draft norms. How would you explain this fall in NTPC by 8 percent today?
A: Basically I have two-three aspects in the regulation which is a negative for NTPC. One is basically NTPC used to have a tax arbitrage because earlier in terms of tariff return on equities (RoEs) have grossed up and NTPC was on a corporate tax basis paying tax around 25-26 times.
So there is an impact of 6-7 percent on FY15 earnings, if this comes in totality for the company just on account of this tax arbitrage.
Second is in terms of incentives, there is an incentive that they have changed and an incentive formula is quite positive. It is 50 paise per unit but the fact is that it is above 85 plant load factor (PLF) and if you look into FY13 numbers, the PLF was 83 percent. So although this is a positive in terms of incentives are higher but to attend that threshold to get that incentive given the load demand currency, the gross domestic product (GDP) not doing that well, good monsoon in the current year... Q2: What are the current incentives structure, aren’t current incentives also available only above a threshold?
A: The current 2009 to 2014 regulation says that the incentives will be based on the availability. So basically if the coal is available, plant will start getting above 85 percent PLF. Now the incentives have been moved from availability to plant load factor. So if there is lower demand or if the prices are high and you ask to back down, in such a scenario you will again be losing out on earnings.
So we believe if they are not able to earn above - they are not able to have their plants above 85 percent then again there will be 2-3 percent impact to that. So around 10 percent on just these two aspects there is impact.
There are further few impacts in terms of operational efficiency have been tightened. So basically we trade where the savings for the company happens and NTPC has been earning a good amount of earnings. So plant level earnings have been like more than 20 RoEs. So I think that will come down significantly.
These are just draft regulations. So one cannot say that all these will come through because typically any regulation change there should be some positive for the corporates and some positive for the consumer. It cannot be a one-sided phenomenon. Q3: Power Grid is also down about 3.5 percent, will this have an impact on Power Grid, does it have higher contribution on incentives as well?
A: Power Grid doesn’t have a major impact. There has been some tightening in Power Grid transmission availability from 98 percent to 99 percent but that to our calculation will impact earnings by 0.2-0.4 percent.
This is generally for generators not for transmission companies and in generators, NTPC because of the tax arbitrage is getting more hit. You will see that stock price obviously significantly down. Q4: You were telling us that the 20 percent RoEs will come down significantly for NTPC. On an average, what are you expecting it to come down to?
A: There is a question in terms of how much PLF that they are able to do, so assuming that they are able to just do 85 and not earn any incentive for 15, my number suggests that the earnings impact could range from 10-13 percent. Q5: No impact on Tata Power?
A: In general what happens is once the regulation from CERC comes then the state regulatory authorities, which is CERC do take into cognizance what are the changes being done by the central regulator. So what that means is that if the SHR related or incentive aspects are made stringent, it will be done even at the state level with a lag but the impact on those companies will be very small -- 1-2 percent impact, in some cases maybe slightly more. But for NTPC the impact would be large.