The Central Electricity Regulatory Commission?s (CERC) final tariff guidelines for Central government-owned power generation companies for FY15-19 weighed heavily on the NTPC scrip on Monday.
Shares of India?s biggest electricity generator fell sharply after investors deemed the final tariff regulations to impact the earnings of the state-owned electricity producer negatively. After opening in the red, the NTPC stock continued to tumble through Monday?s trading session to as low as Rs 116.6. It closed at Rs 117.05, down Rs 15.1 or 11.4%, to its lowest since August 2006.
This is the second sharpest decline seen by the stock since December when CERC had put forward its draft guideline that?s expected to impact the operating norms of power generation companies. The stock lost 11.3% on December 10,2013. The benchmark Sensex closed at 20811.44, up 110.69 points or 0.5% on Monday.
Although, historically, the power regulator was seen adopting a softer stance in its final regulations, CERC?s final road map offered little relief to NTPC’s earnings, believe analysts. BofA ML sees the cut in incentives resulting from the CERC norms as a structural decline in regulated RoEs as well as a de-rating catalyst.
The brokerage reckons that NTPC is likely to be the worst hit among regulated utilities due to an across-the-board cut in its incentives. It expects a 2-10% impact of the changed regulations on the EPS of NTPC and Power Grid Corporation and maintains under-perform rating on both companies.
The final guideline has several negatives for NTPC, the biggest being a change in incentive structure that will now be linked to the plant load factor (PLF) instead of the plant availability factor (PAF). Under the current structure, even if the PLF is lower, NTPC could earn incentives as long as PAF stayed above normative levels of 85%.
However, with the basis of incentive is now being the utilisation level, NTPC would have to schedule the plant above 85% PLF for earning the incentives. Grossing up of RoE at the effective tax rate instead of the corporate tax rate as well as changes in the station heat rate are seen eroding the return profile of India’s biggest electricity generator.
According to Nomura, CERC?s final tariff regulations entail a potential 11-13% cut to its earnings forecast for NTPC post FY14 against an expected 10% dent as per draft tariff regulations. As analysts factored in the impact of new regulations, brokerages like Standard Chartered Bank, Deutsche and ICICI Securities downgraded the stock. The target price on the NTPC stock was also trimmed by 5% to 45% by various brokers.
