CERC's move pragmatic; stick to defensive NTPC, NHPC: IIFL

The Cabinet Committee on Economic Affaris' (CCEA) decision to approve coal price-pass through mechanism where the additional cost of imported coal would be passed on to the consumers has invoked mixed reactions.

In an interview to CNBC-TV18, Harshvardhan Dole of IIFL says that the alternate tariff approach of the Central Electricity Regulatory Commission (CERC) was a pragmatic one. He adds that it was better than letting power companies to continue to bleed furthermore with their current contracts. Further, the profits of companies having overseas coal assets need to be ploughed back, which would help in substitutung the rising prices of imported coal. On his choices of stocks in the sector, he prefers sticking to defensives like NTPC, NHPC. Power Grid is his top choice. Among the private power utilities, he is bullish on Tata Power over others. Also read: CCEA okays new coal price model Below is the edited transcript of his interview to CNBC-TV18. Q: The two people into the contract were power generators and the discoms (distribution companies). Even when they were given the option, power developers didn’t want to hold on or avail the escalation clause which is why they were winning bidders. Will the Cabinet Committee on Economic Affairs’ (CCEA) late entry by changing laws and directions to the CERC help? Will it end in litigation? A: There are two different topics here altogether. One is moral dilemma whether there is a contract which is to be touched. The other is financial viability of the asset. Most of the private sector companies had bid quite aggressively for the projects that are coming operational over the next 12 to 15 months. Some of them have actually commissioned these assets. One can just put forward these contracts and let these assets bleed for next few years. After this they themselves will stop generating power. The other option is looking at alternative prices of spot power/ medium term power which are available in the market and renegotiate the existing contracts. The approach that CERC has taken seems to be quite pragmatic and should balance out interest of both consumers as well as the power sector generating companies. Yes, what kind of returns that these companies should make- 10-12-13-15-18 that is something which will be debated over the next couple of quarters. Hopefully that should lay a foundation for the growth of the industry thereon. Q: Will there be a lot of litigation from hereon due to the opposition from discoms? A: The negotiations are certainly underway. Before they conclude, it will be a bit premature to assume about further litigations and the whole negotiation process being stalled. Take the things as they come. The fine print in the media it is quite clear that the discoms are aware of the ground realities and the realities of doing business in 2013 being different than 2006-2007 or 2007-2008 when these projects had been bid out. Q: Have you quantified the benefit in earnings per share (EPS) or per share value for stocks like Adani Power, Lanco Infratech, Reliance Power, Tata Power; if you have calculated? A: There are lots of if and buts. CERCs order states that lot of companies have got overseas assets; particularly the coal assets. Their profits needs to be ploughed back to neturalise the effect of escalation in the coal prices. We need to see the mechanism that is agreeable to both, the buyers and the sellers which will ensure such seamless pass through. But if one were to take the worst case scenario, if the situation continues the way it is Tata Power’s EPS for that matter will remain unchanged. It will neither see an upside nor downside.
Q: My discussion was on the CCEA’s stating that it is coming as a new actor in a power purchase agreements (PPA) discussion between two different contractors. Can they resolve existing contracts as a third party? What is the stand like? A: The CCEA suggestions are two folds. Every PPA actually has a provision that a change in domestic law can be actually be taken as a force measure or the impact of change in law can be made as a pass through in the PPA. The by the government says that there is basically shortage of domestic production of coal for whatever reason. So, Coal India is required to import coal to honour the fuel supply agreement (FSA). It has essentially entered into the end level power companies. So, that they are exploring that could probably taken as a change in law in India. Since, it is a change in law, each regulatory commission can explore that as a possibility of giving the additional cost; a pass-through in all the PPAs that have been currently entered into. The problem actually pertains to just about 7,000 to 8,000 megawatt (MW) operational assets. Add about 4,000 to 5,000 megawatt PPAs for the projects which are under construction. Here less than 13,000 to 14,000 megawatt capacity will effectively get scrutinized based on whatever has happened on Friday. Rest, things are pretty much unchanged. Q: What are you positive on? Have you turned positive on Adani Power or any of the power companies at the moment? A: On a macro level, the power landscape is changing for better. The three key issues are; the financial health of State Electricity board (SEB), acute shortage of coal in India and most importantly; the problematic PPAs. Those are getting resolved one by one. Probably 12 months down the line, the scenario will be far better that what it is today. But the company specific issues are so acute that some of the private sector companies would need to deal with it so greatly. That will take more than about 18 to 24 months. As of now, we are sticking more to the defensives like NTPC, NHPC and Power Grid that continues to be the top pick and Tata Power that is our preferred pick when it comes to the private utilities.