The draft guidelines for the new power regulatory regime and price has been formulated by CERC and it is expected to hit NTPC the worst
National Thermal Power Corporation Ltd (NTPC) share crashed 11.26% Tuesday on BSE following news of new draft guidelines issued by Central Electricity Regulatory Commission (CERC), which may make it tougher for power producers to earn healthy profits.
As per the draft guidelines, the new regulatory regime is expected to commence from 1 April 2014 and will extend to 31 March 2019. In the new guidelines, the method of calculating incentives is the same—return on equity method—but tightening has been done in other areas, particularly in the taxation and expenses front. This is seen as harsh and is likely to affect the profitability and operations of power plants over the next five years. Other power companies like Power Grid Corp (Power Grid) is also expected to be hit by the new norms. Share price of Power Grid was seen down 3% and Neyvelli Lignite Corporation closed down 1.29%.
As per the draft guidelines released by CERC, the post tax return on equity (RoE) has been maintained at 15.5%, but the incentive structure has been linked to actual generation (PLF) beyond the threshold level of 85%. This number has been pegged 50 paisa/kWh for “ex-bus scheduled energy corresponding to scheduled generation in excess of ex-bus energy corresponding to Normative Annual Plant Load Factor (NAPLF).” This means, producers like NTPC, have to crank out power with a high load factor to make returns worthwhile, regardless of the expenses (such as import of coal from abroad).
The new regime is expected to benefit end consumers (read: other big power companies, large corporations to who buy power from NTPC and Power Grid). Previously, power generating companies like NTPC, Damodar Valley Corporation and NEEPCO were previously “grossing up” their tax liabilities and claiming it from end consumers. However, as per new regulatory guidelines, they will have to claim only on the ‘actual tax paid’. This will reduce margins for companies like NTPC and Power Grid. Edelweiss Securities in a research report said, “We believe the new norms have been framed by tightening operating rules to ensure end consumer benefits from higher efficiency in the system.”
The scope of this regulation is only applicable to companies or power stations where tariff is decided by the CERC. Private players who have sought tariffs through competitive bidding have been excluded from this regulation as are renewable energy companies. The draft regulation states the scope: “where tariff of a generating station or a unit thereof and a transmission system or an element thereof including communication system used for inter-State transmission of electricity is required to be determined by the Commission under section 62 of the Act read with section 79 thereof.”
Edelweiss expects NTPC to be affected badly and sees the company generating 9% RoE instead of the 24% it has been generating so far. The report said, “NTPC, which has historically earned higher RoE (over base rate of 15.5%) of 24% plus via incentives, operational efficiency and tax benefits (we estimate about 9% under existing norms), will likely see pressure on profitability/RoE impacting valuations.”
On Power Grid, Edelweiss says it will be marginally affected. “Tighter operational norms will also impact Power Grid, we estimate it to be limited since RoE of approx 16.5%-17.0% (over base RoE of 15.5%) has marginal contribution from incentives,” the report said.
The CERC has called for views and recommendations from stakeholders and there could be modifications to the guidelines before 31 March 2014. Even if the new norms are enforced, it remains to be seen how companies like NTPC and Power Grid Corporation will be able to recover tariffs as many power companies and power utilities are cutting down on expenses due to the paralysis in the power sector and lack of government initiative to get it off the ground.
NTPC closed Tuesday 11.26% down at Rs136, while Power Grid Corp and Neyveli Lignite ended the day 3% and 1.5% down at Rs98.3 and Rs61.2, respectively on the BSE. The 30-share Sensex also ended the day marginally down at 21,255.
Nifty is still on an uptrend and would appear to be weak below 6,285
After three days of rise, the domestic indices closed in the negative Tuesday breaking the uptrend. The indices opened in the red and continued to head lower on profit booking. Around 1.30pm the indices hit their respective low from where it tried recovering but closed in the negative.
After the poor performance in assembly elections in Madhya Pradesh, Chhattisgarh, Rajasthan with the Bharatiya Janata Party (BJP) getting victory, the Congress has retained power in Mizoram with a landslide margin.
The Sensex and the Nifty opened at 21,294 and 6,355. The indices immediately hit their days high at 21,328 and 6,362, respectively after which it started its downward journey. The Sensex and the Nifty hit low of 21,175 and 6,308. The Sensex closed at 21,255 (down 71 points or 0.33%) while the Nifty closed at 6,333 (down 31 points or 0.49%). The National Stock Exchange recorded a volume of 68.40 crore shares.
Among the other indices on the NSE, only four indices rose which were IT (1.90%); FMCG (0.92%); Metal (0.61%) and Pharma (0.30%) while the top five losers were Infra (3.20%); PSE (3.17%); Bank Nifty (1.84%); PSU Bank (1.83%) and Finance (1.75%).
Of the 50 stocks on the Nifty, 19 ended in the green. The top five gainers were TCS (4.10%); Hero MotoCorp (3.81%); Sesa Sterlite (2.42%); Lupin (2.36%) and ITC (1.58%). While the top five losers were NTPC (11.37%); LT (4.11%); Power Grid (3.85%); I C I C I Bank (3.55%) and BHEL (3.21%).
Out of the 1,223 stocks on the NSE, 354 ended in the positive, 814 closed in the negative while 55 remained unchanged.
NTPC, a benchmark stock, fell 11.26% to Rs136 on the BSE after the Central Electricity Regulatory Commission released draft regulations that will decide the multi-year power tariffs for 2014-2019.
The setback for ruling Congress Party in recent state elections could imperil the country's fiscal deficit target by tempting the government to have less restraint on spending, Fitch Ratings warned on Tuesday. Fitch noted that unless revenue unexpectedly surged, India would ultimately need to cut spending if it wanted to meet its fiscal deficit target. US indices closed in the positive on Monday.
Fed Bank of St. Louis President James Bullard said in a speech the odds of tapering bond purchases have risen along with gains in the labour market, and any reduction should be modest to account for low inflation. His Dallas counterpart, Richard Fisher, said in a Chicago speech that the Fed needs to begin tapering at the earliest opportunity, as the current pace of stimulus comes at a cost that far exceeds its purported benefits.
Except for Jakarta Composite (up 1.46%) and KLSE Composite (up 0.11%) all the other Asian indices closed in the negative. Straits Times fell the most (1.03%).
A series of Chinese data was released today. Industrial output for November rose 10% from a year earlier, slowing from the previous month's 10.3% increase. Retail sales rose 13.7% in November, accelerating from October's 13.3% rise. Tuesday's data also included urban fixed-asset investment, which was up an annualized 19.9% in the January-November period, slowing from a 20.1% gain for January-October. Fixed-asset investment, which is reported on a year-to-date basis, is seen as an indicator of construction activity in China. The European indices were trading in the green. The US Futures were trading marginally higher.
Bank union, AIBEA, demands that banks recover bad loans from wilful defaulters
Trade unions are usually quick to announce protests to demand higher wages or better working conditions. This time, however, the All India Bank Employees Union (AIBEA), one of the biggest employees unions in India, has decided to turn into a powerful whistleblower. On 5th December, AIBEA gave a call to ‘stop the loot of public funds’ and start recovery of bad loans. This is a welcome development. I have always held that the destruction of giant entities, such as Air India, Unit Trust of India, and giant public sector entities in telecom and engineering, is as much due to employee apathy as it is due to the loot by politicians and bureaucrats. AIBEA has signalled that it will name and shame defaulters, if necessary, to force banks to start acting tough and recover bad loans. The Reserve Bank of India (RBI), as the banking regulator, is fully aware of what is going on; but now, the unions are asking it to move from rhetoric to action. The AIBEA cites the overused quote about India having sick industries but no sick industrialists. It also quotes RBI governor, Dr Raghuram Rajan, who recently told banks, “You can put lipstick on a pig but it doesn’t become a princess. So dressing up a loan and showing it as restructured and not provisioning for it when it stops paying, is an issue. Anything which postpones a problem (rather) than recognising it, is to be avoided.” AIBEA points out that the top four bad loan accounts add up to a massive Rs22,666 crore, which include Kingfisher Airlines and Winsome Diamond and Jewellery Co. Will RBI stop the “systematic loot of public money” by recognising these as pigs with lipstick?
The data collated and released by the AIBEA is a frightening indictment of the banking regulator and the finance ministry. While the government has been boasting about India having escaped the global financial crisis, how does it explain the four-fold increase in bad loans—from Rs39,000 crore in 2008 to Rs164,000 crore today? The creation of new bad loans is a mind-boggling Rs495,000 crore, according to AIBEA. And, corporate debt restructuring through provisioning, concessions, waivers, write-offs, concessions, one-time settlements (which are done multiple times), compromise proposals, etc, add up to a massive Rs325,000 crore.
Write-offs of bad loans by PSU banks in the past seven years amount to a massive Rs140,000 crore. If we include the bad loans of private banks and foreign banks and other financial institutions, the total bad loans are more than Rs2,50,000 crore, says the AIBEA statement. Worryingly, it says, things have reached a point where management is making banks vulnerable by reducing the provisioning of bad loans. RBI has pointed out, and is aware, that the provision coverage ratio of India’s banking system has dropped from 55% to 45% as against a global average ratio of 70% to 80%.
AIBEA’s demand will resonate with depositors who are being asked to pay higher charges for every service, to ensure higher profits for banks every quarter. AIBEA, for once, is on the same side as two big stakeholders of banks—bank customers and shareholders. Clearly, the call to publish the names of defaulters, to make wilful default a criminal offence, investigate collusion between banks and borrowers and the demand not to ‘incentivise corporate delinquency’, will find huge support among ordinary people.