The Central Electricity Regulatory Commission (CERC) has notified the final regulations on tariffs for the power sector applicable between FY15 and FY19. Also, base RoE (return on equity) for thermal generation has been maintained at 15.5%.
*Trimming of incentives: (i) incentives would be linked to plant load factor (PLF) or actual generation rather than plant availability factor (PAF); (ii) savings on fuel cost in case the operating performance betters norms will be shared with beneficiaries in a 60:40 ratio; (iii) station heat rate (SHR) norms have been tightened; and (iv) recovery of fixed charges will be linked to PAF of 83%.
*Removal of tax arbitrage: The CERC proposes to remove tax arbitrage under which companies like NTPC derived tax arbitrage income of up to Rs 10 bn per annum. The current formula for pre-tax RoE allows only two rates for grossing up RoE – MAT or corporate tax.
*Only silver lining: Water charges have been made pass-through. The charges for FY12 and FY13 were R3.3 bn and Rs 4.9 bn,respectively, for NTPC.
*Impact on financials: Downgrade earnings estimates by 12%/ 14% for FY15/ FY16.
We estimate that the new CERC regulations would significantly reduce RoE for NTPC’s generation projects by 4% led by impact of PLF-linked incentives, sharing of fuel savings and removal of tax arbitrage. Although the stock has fallen sharply and is trading cheaply at 11.7xFY15e earnings, 1.2xFY15 BV (book value) and 4.3% dividend yield, we believe there is no trigger for the stock to move up over the next six-nine months. As a result, we have downgraded our rating to Neutral with a revised price target of Rs 124.