The Uttar Pradesh Electricity Regulatory Commission’s decision to not approve the 200 megawatts (MW) power-purchase agreement (PPA) between the Noida Power Co. Ltd and Dhariwal Infrastructure Ltd once again raises a question mark over CESC Ltd’s earnings.

Dhariwal Infrastructure is a unit of CESC. It houses the 600MW thermal power project at Chandrapur in Maharashtra. The plant has long-term PPAs for only half of its capacity and around 300MW lacks long-term purchase agreements. This under-utilization is resulting in losses, which are ultimately borne by the parent company.

According to ICICI Securities Ltd, the Chandrapur project is incurring a quarterly cash loss of Rs90 crore. Last fiscal year (FY17) the unit posted a loss of Rs484 crore. Without this loss, the consolidated entity’s profit would have been higher by 70% in FY17.

Considering the quantum of loss and the kind of pressure it is exerting on the consolidated entity’s profit, any reduction in losses at this unit (along with the retail business, which however has lower losses) has become key to improving earnings for CESC.

As the company began talking about the now disapproved PPA, analysts had started to pencil in an improvement in profitability next fiscal year. With the situation now back to square one, FY18’s earnings estimates can see substantial cuts unless the company manages to secure other PPAs.

“Our current earnings forecasts for Chandrapur build in the 200MW offtake under the second 200MW PPA with NPC (Noida Power Co.) starting 2HFY19 and accordingly, the plant to turn profitable in FY19F," Nomura said in a note. “Ceteris paribus, if we assume 300MW to remain idle in FY19F, our FY19F PAT forecast for CESC would drop by 9% to Rs12.5billion." One billion equals 100 crore. PAT stands for profit after tax

Of course the company is actively looking to tie-up the rest of the troubled plant’s capacity. It is participating in short-term PPA bids and other options. Any incremental PPA will help reduce losses.

Further, given that the Uttar Pradesh regulator has directed the Noida Power Co. to procure the requisite electricity requirement through a competitive bidding process, CESC still stands a chance to bid for the contract.

But the challenge now is the tariff. As the Uttar Pradesh Electricity Regulatory Commission’s order points out, tariffs in competitive bids have fallen below Rs4 per unit. If there is no sustained recovery in demand, excess capacities and competition can continue to weigh on tariffs, upsetting realisations and returns from the plant.

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