Are budgetary tax tweaks enough to boost the power sector?

Addressing the coal shortage problem will do more for power sector stocks
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First Published: Wed, Feb 20 2013. 06 13 PM IST
Indian power companies are adding capacity at a rapid pace but are not finding enough fuel to power them. Photo: Indranil Bhoumik/Mint
Indian power companies are adding capacity at a rapid pace but are not finding enough fuel to power them. Photo: Indranil Bhoumik/Mint
Updated: Wed, Feb 20 2013. 11 34 PM IST
The BSE Power index has lost 17.7% since the last budget compared with an 11% gain for the benchmark Sensex gauge. The previous budget had a slew of incentives for the power sector such as allowing external commercial borrowings to part-finance the rupee debt of the existing power projects and removing basic customs duty on thermal coal and natural gas. But obviously, they were not enough to alleviate the problems of this sector.
The duty on thermal coal was eliminated keeping in mind the chronic fuel shortage. The power industry alone needs to import some 80 million tonnes (mt) a year now. But, as Mint reported on 18 February, power producers haven’t been able to avail of the benefits due to a different interpretation by customs authorities. A clarification on that may come in this year’s budget announcement.
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Secondly, it is widely expected (as per brokerage firms’ reports and industry wish lists) that the finance minister may extend the tax holiday under section 80IA for infrastructure projects. That rule allows power companies 100% tax exemption on their profit for any 10 consecutive years during the first 15 years of operations.
Thirdly, there are some expectations that the government may come up with some incentive scheme to nudge state electricity boards (SEBs) to cut their transmission and distribution losses. As of 2010-11, the latest year for which data is available, these losses amount to as much as 24% of electricity generated, a key reason for their huge losses.
Fourthly, there are expectations that the budget may allocate some money towards restructuring of state power distribution companies. Despite the government announcing a scheme to restructure the Rs.2.4 trillion debt of SEBs, the response has been lacklustre, according to Kotak Securities Ltd. The deadline for this has been extended to the end of the fiscal year. However, with fiscal prudence remaining the overarching theme for the budget, it remains to be seen how much money will be allocated.
If these measures come to fruition, no doubt it would be positive for power companies. However, investors would do well to remember that the budget can only do so much to tackle the structural problems surrounding the sector.
Simply put, Indian power companies are adding capacity at a rapid pace, but are not finding enough fuel to power them. The total coal requirement is estimated at 604 mt by 2017, of which 238 mt may have to be met through imports. The coal shortage has meant that thermal power plants operated at a dismal 70% level of capacity utilization. A solution to this problem will do more for power sector stocks than just tax tweaks.
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First Published: Wed, Feb 20 2013. 06 13 PM IST
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