See Tata Power rerating once tariff hike effected: Antique

The compensatory tariff hike that Tata Power and Adani might see will be a huge relief for the sector, says Rahul Modi, Antique Stock Broking.

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A Deepak Parekh committee has recommended a hike of 55-58 paisa per unit, he says. The recommendations pertain to compensatory tariffs for Tata Power's 4,000 MW plant and Adani Power's 4,620 MW project. CERC had allowed Tata Power and Adani Power to raise electricity tariffs for these projects in April this year to mitigate the rise in coal costs.
Tata Power is likely to be the biggest beneficiary because as per Modi's estimates, one can expect the company to report Rs 200 crore profit due to the 55-58 paise hike, instead of Rs 1,000 crore loss without the hike. Hence the stock may see re-rating.
If the 58 paisa hike in tariff comes in, Tata Power's EPS will go as high as Rs 7 from current Rs 2.2. But it will take some time since as of now the recommendations have only been submitted to CERC. It will now conduct a public hearing and only then give the go ahead if all parties agree to the tariff hike. Below is the verbatim transcript of Rahul Modi's interview on CNBC-TV18 Q: Let us start with this compensatory tariff issue, which really was in the limelight in the past. How do you view the situation now and how would you approach a stock like Tata Power?
A: It is a very big positive move in the sector and it was long expected. Now what we are hearing is that Deepak Parekh Committee has recommended a hike of something between 55-58 paisa per unit. Now a stock like Tata Power is the biggest beneficiary because we were expecting around Rs 1,000 crore of loss in FY14 due to lower tariffs. Now due to around 55-58 paisa hike we are expecting a Rs 200 crore profit, so the losses which are coming in that will be wiped off completely. So, there will definitely be a rerating in the stock. Q: So what is the price target right now on Tata Power and what kind of earnings estimate are you factoring in?
A: If the 58 paisa tariff hike comes in, we believe we currently have estimated earnings per share (EPS) at 2.2. However, if the tariff hike comes in it will go as high as Rs 7, but again there are some caveats to the recent hike, which has been discussed. Firstly, it is yet to be made official. It has been submitted to the Central Electricity Regulatory Commission (CERC) and now CERC will conduct a public hearing.
Only after all the related parties are heard then they will come down to a conclusion as to how much the actual tariff hike should be given in. So that there are no parties who are contesting the order going ahead and the stalemate continues. So, we expect some time to pass before the earnings estimate will see an upgrade. But again it is directionally very positive.
_PAGEBREAK_ Q: You don’t expect this to get into litigation?
A: I have been speaking to a lot of the state electricity boards (SEBs) and some regulators as well. Now all the related parties had respective participation in the committee. So, they have given their recommendation and now the outcome is 55-58 paisa. If you look at the power market in India, again something below Rs 3 even after the hike is a very affordable tariff and capacities as large as 4,000 MW ultra mega power projects (UMPPs), I don’t see that getting into a stalemate any further. Q: Any other companies in the power sector that looked like they have turned the corner where you are having a positive opinion?
A: There have been some positive developments in the sector of late, specially starting with the financial restructuring package (FRP). Now most of the states have agreed and are on board. So with Tamil Nadu, Uttar Pradesh (UP), Haryana all agreeing, Madhya Pradesh has improved its fundamentals, so has pulled out of FRP. I believe the others will follow suit. So in the next 2-3 months I am expecting FRP to come through.
So that will provide a lot of liquidity in the power system. So, the SEBs issues to quite an extent will be sorted out. So that will actually be very positive and with the onset of elections we will see higher buying by states coming through. So, power projects will see higher capacity utilisations and probably a little higher prices that we have seen and - than what we have seen in the last four-five months.
Also, what we have seen is the recent Cabinet Committee on Economic Affairs (CCEA) announcement and the directive given to Coal India to sign fuel supply agreements (FSAs) for around 78,000 MW. Now again it is a process, it is not an event. Now there have to be some changes made in the new coal distribution policy (NCDP), which I believe has been done. Now the onus is on the respective power projects to actually approach the respective State Electricity Regulatory Commissions (SERCs) and ask for the tariff approvals.
So once that come in place a lot of these independent power producers (IPPs), which we are currently seeing in the red might see some kind of a positive profit number. So that is something which is positive. But again, there is some time to go. So, we would like to stick to heavyweights like the National Thermal Power Corporation (NTPCs) and Power Grid. Q: The fundamental problem is that recently ofcourse 15,000 new MW of power capacity was also approved. The problem is that the existing projects don’t have fuel right now. Your fuel supply problem is still not sorted. So going forward is it tough to be bullish on a sector like this where you don’t even have fuel linkages to go out and produce power, forget about tariff that will come in the later stage?
A: Actually the problem has started with tariffs. Now what we have seen in the last 20 years, SEBs have been going bust every 10 years. So, this is the third time, this happened in 2001, the offshoot of which was the Electricity Act and the Ahluwalia Committee giving in for the restructuring package then. Now, something similar has happened, the FRP has come through.
So once the states start buying then automatically the pass throughs come in, they will stop objecting to higher tariffs, which will help. Imports are a reality today because Coal India’s production growth is not in sync with capacity growth in India. But the saving grace is the captive coal mines of big players like NTPC, which are coming in despite all the issues. So, we believe that will significantly contribute to the growth in the sector. So, if you are actually looking at growth, it is only coming from public sector undertakings (PSUs) in the sector in terms of fresh capacity.
We had recently come up with a report where we had studied around 15,000 MW of under construction capacities and we had met with various plant heads. Now the key outcome was that they will not be investing even Rs 1 in the sector till there is clarity, but the likes of NTPC are still going ahead with 3,000-4,000 MW getting commissioned every year, so where the fuel is not the issue as much. Stay tuned for more..