With the Central Electricity Regulatory Commission’s (CERC) tariff regulations for FY15-19 expected to shave 11-13% off NTPC earnings post-FY14, the genco’s stock tanked to a seven-and-a-half-year low on Monday. The scrip fell by more than 11% to close at Rs 117.05 as the regulator, contrary to expectations, tightened the norms for gencos and transmission companies.
While the regulator has acknowledged that the cost of capital has risen and has, therefore, retained the assured post-tax return on equity at 15.5% — gencos are allowed an additional 0.5% if units are commissioned within the benchmark timelines — the CERC has decided that the tax on income is to be computed with reference to the actual amount of tax paid, rather than at the applicable corporation tax rate. “The grossing up of the tax on the actual paid versus the applicable tax rate to hit NTPC,” Bank of America Merrill Lynch wrote in a report. Analysts estimate that the tax gross-up boosts NTPC’s annualised earnings by about 7%.
The CERC has also tweaked the incentive structure — incentives will now be pegged to the plant load factor (PLF) rather than the plant availability factor (PAF) though the incentive itself is an attractive flat 50 paise /kWh. Currently, gencos earn incentives merely if their PAF exceeds 85% and the new structure will hurt the public sector power producer. “We believe linking the generation-based incentive to PLF would be negative as the PLF has been lower than the PAF given several state electricity boards have not been drawing power in view of the lower demand,” an analyst observed.
“The final tariff regulations overall offer meagre relief to NTPC’s earnings outlook, in our view. Purely on benchmark operating norms, our first cut calculations suggest that CERC’s final tariff regulations entail a potential 11-13% dent to our earnings forecast for NTPC post FY14,” brokerage Nomura said on Monday.
The regulator has also announced a cut in the normative working capital for coal-fired units. The cost of coal inventory, included in the calculation of normative working capital, has been cut to 15 days for pithead stations from the current 45 days and 30 days for non-pit-head stations from the current 60 days.
“Led by excess RoEs and sector opening up, capacity add has been robust, deficits have halved and likely collapse by FY16. Consequently we believe that now is the time for the regulator to wear its ‘consumer protection’