Coal cess hike to pinch merchant power players

While there were low expectations from the Union Budget for the power sector, the doubling of the clean environment cess on coal and lignite to Rs 400 a tonne will lead to producers’ electricity cost rising by Rs 0.9-1.3 per kilowatt hour, estimate analysts. The increase will depend on the grade of coal and distance between mine and power plant. Companies having cost-plus power purchase agreements (PPAs) as NTPC or Reliance Power will not get impacted, as fuel costs are a pass-through. However, these such as JSW Energy, which sells 20 per cent of coal-fired capacity in the open market and therefore exposed to short-term and merchant rates, might feel the pinch since costs will not be pass-through. Among others, Adani Power having nine per cent of total capacity (especially from its Mundra project) exposed to short-term or merchant power will also feel the heat. Similarly, CESC, which can sell about 75 Mw from its Kolkata business as merchant power, might feel the heat.

Overall, analysts at Nomura expect about three per cent impact on JSW Energy’s consolidated FY17/18 earnings, while Adani’s FY17/18 bottom line are expected to be impacted by 12-14 per cent due to low base. Coal India might not be directly impacted, but increase in cess might limit its ability to take price hikes given the weak demand scenario. The government’s high disinvestment target means the stake sale overhang on Coal India and NTPC will continue their stock prices in check.

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Nevertheless, there are some positives including the increased outlay for renewable energy. Analysts at Elara Capital believe this would accelerate solar power projects and is positive for NTPC and Reliance Power, as they plan to set up 3.3-Gw solar projects each by FY19.

Another positive is permitting PPA renegotiations in disputed projects, which can help revive capex cycle in power and will be positive for some power players. While this is likely to take a few quarters, renegotiations can benefit players as Adani Power, Tata Power, GMR Energy and RattanIndia Power, say analysts at Elara.

The transmission and distribution sector as well as transformer companies will benefit from the targeted completion of rural electrification by 2018. Hemal Zobalia, partner, Deloitte Haskins & Sells, says long-standing issue on availability of incentive to power transmission companies is answered with additional depreciation of 20 per cent on new machinery being extended for power transmission as well.

Of all, Power Grid, which remains unaffected by the increase in coal cess and is a potential beneficiary of the increase in FPI limit to 49 per cent, is best placed. Analysts at Nomura say Power Grid is best placed with historically high level of foreign portfolio investment in the stock (25.7 per cent as of December 2015).

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