*Trimming of incentives: (i) incentives would be linked to plant load factor (PLF) or actual generation rather than plant availability factor (PAF); (ii) savings on fuel cost in case the operating performance betters norms will be shared with beneficiaries in a 60:40 ratio; (iii) station heat rate (SHR) norms have been tightened; and (iv) recovery of fixed charges will be linked to PAF of 83%.
*Removal of tax arbitrage: The CERC proposes to remove tax arbitrage under which companies like NTPC derived tax arbitrage income of up to Rs 10 bn per annum. The current formula for pre-tax RoE allows only two rates for grossing up RoE MAT or corporate tax.
*Only silver lining: Water charges have been made pass-through. The charges for FY12 and FY13 were R3.3 bn and Rs 4.9 bn,respectively, for NTPC.
*Impact on financials: Downgrade earnings estimates by 12%/ 14% for FY15/ FY16.
We estimate that the new CERC regulations would significantly reduce RoE for NTPCs generation projects by 4% led by impact of PLF-linked incentives, sharing of fuel savings and removal of tax arbitrage. Although the stock has fallen sharply and is trading cheaply at 11.7xFY15e earnings, 1.2xFY15 BV (book value) and 4.3% dividend yield, we believe there is no trigger for the stock to move up over the next six-nine months. As a result, we have downgraded our rating to Neutral with a revised price target of Rs 124.