Power Sector – Something Better Than Nothing

The power sector has been out of the investors’ fancy since last year. It started showing some bullish sentiment in the current year when some proactive development was seen from the government. This year’s budget therefore has been very significant as large capacities have been added but issues like fuel security and the financing woes have haunted the sector. The sector was seeking various duty reliefs from the government and we believe that some of the demands have been accepted. This could be a good step towards improving the status of the sector.

Positive

As regards the generation space, to address the issues related to fuel supply Coal India has been again advised to sign fuel supply agreements with those power plants that have entered into long-term power purchase agreements with the distribution companies and would get commissioned on or before March 31, 2015. That apart, gas and liquid natural gas have also been made duty-free. Coal, the major fuel of power sector in India, has also been subjected to full exemption from basic custom duty and a concessional CVD of 1 per cent has been granted for the next two years.

We see this positively as there is a huge coal deficit and companies now import coal. With the domestic coal supply coming into the picture, companies may get some respite. Also, some respite has also been given to the coal mining sector by providing exemption to the coal mining projects and also decreasing the basic customs duty from 10 to 2.5 per cent on the machinery and instruments used for surveying and prospecting of mines. We see this as a positive move because recently coal prices have been moving in the upward direction. With this duty exemption the domestic coal prices may not go up substantially, thus giving relief to the sector.

Positive

To address the financial woes of this sector the finance ministry has proposed an external commercial borrowings (ECB) route to part-finance the rupee debt of the existing power projects. This is also a positive move as the liquidity crunch in the sector may partly get resolved. The government has also taken a baby step by announcing tax-free bonds from power companies of Rs 10,000 crore for the fiscal year 2012-13. We are of opinion that both of these announcements to some extent will ease financing in the sector.

Positive

The ministry has also proposed extension of the sunset date by one year for the power sector so that they can set up the plants on or before March 31, 2013 to claim 100 per cent deduction of profits for the next 10 years. The ministry has also allowed additional help by allowing depreciation of 20 per cent in the first year for the power generating companies. This will help the companies to accelerate the commissioning schedule and bring more capacity on stream before the next year. We may see companies like Adani Power, Torrent Power and Tata Power deriving the maximum benefit as they are commissioning their large capacities this year.

Some respite has been given to the IPPs by not increasing the custom duty on power generation equipments. We believe this is good for power sector companies like Tata Power, Adani Power and Reliance Power who have capacities based on foreign power equipments. Equipment manufacturers like BHEL, L&T, Thermax, etc, however, will see this negatively.

Positive

While on the renewable energy front, equipments for setting up of solar thermal projects are fully exempted from SAD (special additional duty). A concessional rate of 5 per cent basic customs duty is extended to raw materials used to manufacture parts and sub-parts of blades for rotors for wind energy generators.

Conclusion

In our opinion this budget has offered some promise of fuel security. However, one should take into account that even though the duties have been removed on the fuels, the issues related to the tariffs have remained unaddressed. Besides, it is not clear how coal production in the domestic market would go up. We believe that all eyes will now be set on the 12th Five Year Plan which will further address these issues. Overall the market has seen the budget negatively due to increased service tax and excise duty. The power stocks have also fallen on the bourses for the same reason. Going ahead we expect some revival in their share prices. We see this budget as favourable for companies like NTPC, Power Grid, Tata Power, Adani Power, GMR Infra, GVK Power, etc.

Scrip-Wise Price Movement Of Top Power Companies