While the ROE remains at 15.5%, tax will be computed on the actual income against the normal tax rate earlier. Also, the incentive structure for generation is now linked with PLF (plant load factor) vs PAF (plant availability factor). The only favourable change is that the interim normative PLF is lower at 83% vs 85% in the draft.
We believe linking generation-based incentive to PLF would have an adverse impact on NTPC, because in the current dispensation, PLF < PAF (as there is no draw down from SEBs on lower demand).
However, a partial relief is that the normative interim PLF is kept at 83% till the next review. We are building in 82% PLF for FY15, in line with the previous 12-quarter average. The lower incentive structure would hit ROE by ~1.4% and has an adverse impact of ~5% on annualised earnings. Analysis suggests that seven out of NTPCs 15 coal stations have PLF >83% in FY13 and FY14 YTD.
We have cut our FY15/16 earnings estimates by ~13% to incorporate removal of tax arbitrage and a lower incentive structure. Meanwhile, the stock has already dropped ~15% after the draft regulations vs the 3% fall in the Nifty and we see no further downside from current levels.