Power Stocks Jump On New Draft Tariff Norms

Shares of NTPC Ltd. and Power Grid Corporation of India Ltd. jumped after the power regulator kept the return-on-equity caps unchanged and also allowed additional security expenses in the five-year draft tariff norms.

The Central Electricity Regulatory Commission retained the return-on-equity at 15.5 percent. A consultation paper had earlier said that the cap may be lowered to 14-15 percent.

The new draft norms provide for…

• Additional security expenses over and above operational and maintenance spending.
• A higher allowance for losses due to the quality of coal.
• A special allowance to cover inflation.
• A lower plant availability factor from 85 percent earlier to 83 percent.

Shares of NTPC and Power Grid rose as much as 5 percent each in today’s trade compared with a 0.59 percent gain in the benchmark NSE Nifty 50 Index.

“India’s power regulator’s draft FY19-24 regulation was a positive surprise and a big departure from its earlier approach paper,” CLSA said in its report to clients.

Multiple brokerages including Motilal Oswal said the draft, if finally accepted, is expected to boost earnings for NTPC and Power Grid. “Power Grid’s earnings could see a further 8 percent upside from earlier estimates as its previous assumption was based on a 14 percent return-on-equity,” Motilal Oswal said in a sales note to clients.

Swarnim Maheshwari, analyst at Edelweiss Research, is still cautious. It’s premature to predict the impact of draft regulations on earnings, he said while estimating a 4 percent and 1 percent gain in earnings per share of NTPC and Power Grid, respectively. He said the broking firm will await the final rules (scheduled for February 2019) given differences between the draft and final norms in the past.

The new norms also disincentivised old power plants. The regulator proposed to shift to a net asset model after 25 years. Which means, the return-on-equity will be calculated based on the value of assets as of that date after depreciation. Moreover, a special allowance for old plants will not be increased based on inflation.