India’s power regulator (CERC) needs to do a balancing act while deciding on FY20E-24E equity return norms for generation and transmission projects. Reviving the dwindling sector investment and lower prices for end-consumer are the conflicting themes it has to deal with. Our recent interactions with companies and industry experts indicate no material regulated ROE change and focus on options to contain coal costs. Prefer NTPC to Power Grid (Hold).
Current demand trends ramping up to 8% CAGR will not need incremental announcements for capacity addition until at least FY22E.
AT&C losses have declined and tariff hikes are also being taken at a gradual pace. Fuel is the single largest cost component at 83% of power cost. For regulated entities, fuel cost is a pass through including taxes and transportation. Our industry interactions suggest that officials are monitoring coal pilferage/leakages and billing charges vs calorific value to contain power costs.
Every five years CERC evaluates and finalises projects returns for regulated generation and transmission companies. FY20E-24E is the next five-year block. CERC is focused on not hampering sector investments, and interest rates are also seeing a hardening trend. Hence, we believe regulated ROE should see upside surprise of a marginal change vs our/ consensus’ earlier expectations of 15.5% dropping to 14%.
We believe the next 12 months should see NTPC benefitting from improving PLFs, better regulatory environment, lower coal shortages and mining. We raise our NTPC/Power Grid FY20E estimates by 2-5%, factoring in regulated ROE reducing to 15% vs 14% previously. We maintain ‘Hold’ on Power Grid, as we believe de-rating from slowing growth should cap upside and revise TP toRs 210 (from Rs 205).