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Electricity demand load shifted to homes during the lockdown, resulting in lower realizations. Commercial and industrial power demand has taken a hit after many factories shut down. (Photo: Pradeep Gaur/Mint)
Electricity demand load shifted to homes during the lockdown, resulting in lower realizations. Commercial and industrial power demand has taken a hit after many factories shut down. (Photo: Pradeep Gaur/Mint)

NTPC, Power Grid investors worry about rebates and cost write-offs

  • Fixed, interstate transmission charges for power not drawn from NTPC, other CPSEs during lockdown will be waived
  • The government has also proposed that central public sector generation companies offer rebates to discoms

Good things sometimes come with strings attached. The Centre’s 90,000 crore liquidity support will ease the financial logjam at power distribution companies (discoms), helping them clear pending dues.

But the stipulation that central public sector enterprises offer rebates and forgo fixed costs for power not consumed during the lockdown will adversely impact earnings of electricity generators and transmission companies.

Shares of NTPC Ltd and Power Grid Corp. of India Ltd lost 3-4% on Thursday. Even the stocks of the companies that will provide liquidity support fell. Power Finance Corp. Ltd (PFC) and REC Ltd were down 1-4%.

Graphic: Satish Kumar/Mint
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Graphic: Satish Kumar/Mint

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As of March, NTPC has approximately 14,000 crore of receivables outstanding from state electricity boards. Depending on the payment time, the company generally provides 1-2.5% of rebate to customers.

A 2% rebate on the outstanding receivables amounts to 280 crore, a 2% hit to NTPC’s profit estimates for 2020-21.

But the quantum of impact will rise significantly if NTPC has to forgo fixed costs for the unused power during the lockdown.

After fuel, fixed cost is the next big expense for NTPC. It constitutes finance, depreciation and operating expense, which amount to 30-40% of tariffs. Waiver of this cost can lead to a large cost under-recovery. “Our back-of-the-envelope estimates taking pro-rata fixed cost for two months and assuming a 25% lower offtake (in sync with fall in overall power demand), indicates a possible hit of around 10% to FY21 earnings for both NTPC and Power Grid," JM Financial Institutional Securities Ltd said in a note.

It is, however, not clear yet how the government plans to compute the waiver on fixed charges. Also, unless it explicitly treats this as a one-time exception, the development can be an overhang for public sector utility stocks. After all, these stocks are known for their defensive characteristics and minimum guaranteed returns on capital invested by them.

“We believe sustainable derating will be avoided if the message comes out loud and clear that it is one time," Jefferies India Pvt. Ltd analysts said in a note. Meanwhile, the fall in PFC and REC stocks reflects the investors’ wariness on their rising exposure to troubled discoms.

Ratings agency Icra warned discoms’ losses can rise as much as 66% this fiscal year due to the fall in electricity usage by high-tariff paying industrial and commercial consumers, and delays in cash collections from other consumer segments.

Further, disbursements are linked to discom reforms and financial and operational loss reduction, a time-consuming task. So, while the actual lending burden may not be as large as the headline number indicates, higher exposure to troubled discoms can also heighten asset quality risks.

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