CERC, the central regulatory authority for the power sector has issued a new notification that deals with the tariff computation for the years 2009/10 to 2013/14.
The key points in the notification are:
·Normative debt-equity ratio unchanged at 70:30.
·Return on Equity (RoE) increased from 14% post-tax to 17.481% to 24.239% on a pre-tax basis. The key difference being the assurred post-tax RoE to an assured pre-tax RoE. We believe that this would incentivise more investments in this sector, as also boost returns of existing players.
·Depreciation rates enhanced to 5.28% on the main plant and equipment, but concept of Advance Against Depreciation (AAD) removed. AAD was introduced mainly to ensure that higher fixed costs are recovered in the earlier years so as to enable the project developer to repay the loans.
·Fixed Cost recovery would now be based on 85% plant availability factor (PAF), as against the earlier 80% plant load factor (PLF).
We believe that this would increase the profitability of more efficient players such as NTPC as their plant availability factors as high, especially as while PAF is in their control, PLF (or demand) is not within their control.
·O&M expenses continue to be allowed on a normative basis, that is the absolute amount of O&M expenses is specified.
We believe that Tata Power and Reliance Infrastructure would not immediately benefit from these new regulations as they are covered by the regulations of the Maharashtra Electricity Regulatory Commission (MERC).
Having said that, we also believe that all the state electricity regulatory commissions would follow suit, and use these regulations are model guidelines. However, each state has a different time line, and that for Maharashtra is 2007/08 to 2009/10.
Similarly, the benefits for Torrent Power would accrue later as the timeline followed in Gujarat is 2008/09 to 20010/11. However, it is possible that given the new regulations by CERC, the state commissions may follow sooner, rather than later.
The immediate beneficiaries would be NTPC, Neyveli Lignite and Powergrid in the listed space. We reiterate our BUY recommendation on NTPC with a target price of Rs217, and a further upward bias.