CERC Order Brings Relief To Power Stocks

On April 3, 2013, power stocks put up a good show on the bourses following a Central Electricity Regulatory Commission (CERC) order pertaining to Adani Power’s Mundra power plant. Adani Power gained nearly 9% by closing on the same day. Tata Power too went up in the early trading sessions, but gave up most of its gains as the markets turned volatile.

As per the order, power sector regulator CERC has directed power utilities in Gujarat and Haryana to pay a compensation package to Adani Power. This is to provide a cushion to the company in order to recover higher costs of coal in view of the change of coal pricing regulations in Indonesia in September 2011. Companies using coal from Indonesia have been facing margin pressure and were unable to recover their input costs due to the regulatory environment as well as the unwillingness of distribution utilities in these states to pay higher prices. Thus, this order looks like another positive step to improve the sentiment on the power sector.

Adani Power has two separate agreements with distribution utility in Gujarat priced at Rs 2.35 and 2.89 per unit for power procured from two different power projects based on Indonesian coal. It also has an agreement with a distribution utility in Haryana to sell power at Rs 2.94 per unit. While Adani Power was seeking to raise the tariff from these projects, the utilities had rejected Adani Power’s request. This had forced the power company to move the CERC, which oversees these matters.

CERC has ruled that the compensation package should be paid to Adani Power unless international coal prices are stabilised.

This news also has a potential positive bearing on Tata Power and Reliance Power. Tata Power is procuring coal from Indonesia for its Mudra UMPP. The company has asked for a tariff hike of about 60 paise, but 5 states which will be buying power from this UMPP have rejected its request. Tata Power has also moved CERC, asking for a tariff hike. In the background of the favourable ruling for Adani Power, the chances of Tata Power getting a similar ruling are high. Reliance Power will also use Indonesian coal to run its Krishnapattnam UMPP, and therefore, the stock moved up in the initial trading hours.

On the face of it, the decision looks a most important one for the power sector. We expect to see a short-lived rally in the power stocks on the bourses. Investors with a strong risk appetite may look to buy shares of Tata Power and Adani Power and book profits immediately. The long-term fundamentals may not change immediately, at least until the ruling is implemented.