Power sector reforms a positive for NTPC, PGCIL

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Jitendra Kumar Gupta Moneycontrol Research

The power sector has had an electric performance over the last month with the S&P BSE Power Index surging over 15 percent. While the broader market was supportive, much-needed government policy actions addressing some of the issues facing the sector also helped.

Returns to improve

The biggest uncertainty and fear was a decision by CERC, the regulatory body, on the return on equity (RoE) for regulated plants mostly due to lower interest rates and reduction in the cost of capital. The CERC, however, retained the RoE at 15.5 percent. This has helped companies such as NTPC and Power Grid Corporation Of India (PGCIL), whose exposure to regulated assets had made investors apprehensive.

NTPC, for example, has regulated equity of close to Rs 55,000 crore. Even a 100 basis points reduction in the regulated equity would have resulted in close to Rs 550 crore of impact on profits.

It also brought big relief for old plants of NTPC as the market feared the policy would disincentivise all older plants that are past their useful life. However, as per the policy, the equity consideration for such plants would be capped to 30 percent of the capital employed. Only a part of these older capacities will lose their incentives, while the rest will still get regulated returns. This proves beneficial for NTPC and neutral for PGCIL whose assets are relatively new.

Reduce operational losses

The other important policy change was addressing the issue of under-recoveries. Fuel loses its gross calorific value (GCV) from the point of mining to the point of firing. Earlier, the billing was measured at the loading point, which has now been changed to the firing point. This will help companies recoup losses incurred during transit, which could be as high as 6-7 percent in the case of NTPC, improving overall profitability.

Another benefit is in terms of the cost pass-through that was allowed. O&M (operation & maintenance) expenses increased by 9 percent for FY19 providing an additional escalation provision of 3-4 percent for subsequent years.

The policy also increased the PLF (plant load factor) or plant availability- based incentive, which is good for NTPC. Earlier, if a plant operated at 85 percent PLF, a flat 0.5 paisa was provided for every unit, which has been increased to 0.65 paise per unit during peak hours and 0.5 paise for non-peak hours.

Incentives for efficiencies

Incentives come with an eye on improving efficiencies. The policy has tightened norms for the working capital, which includes 15 days reduction in receivables to 45 days and inventory to 20 days as against 30 days earlier.

Also, for calculating the pass-through component of the interest cost, the definition of bank rate has been linked to SBI’s MCLR as against SBI base rate in the past. This means 100-150 basis points reduction in the interest cost. While companies like PGCIL do not have much working capital and thus get marginally impacted, NTPC would suffer and will have to tighten its working capital cycle.

Conclusion

While there are several other changes incorporated in the bits and pieces, in totality, the new rules will benefit state utilities and remove uncertainty over their returns and cash flows, which the market has been worried about. The stress is on improving the efficiencies and most of the incentives discussed are favourable for companies like NTPC and PGCIL.

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