Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Utilities’ ROEs have been understandably stable, given the dominant
contribution from state-owned utilities that earn assured returns on
(equity) investments made. Stable operating margins and high
leverage drive up ROE—despite low asset turnover whose effect is
exacerbated by high CWIP.
Utilities’ tariffs are largely set on the basis of “cost plus assured
returns”. Under this method, utilities can pass on all the operational
costs (fuel, staff costs, etc) and financial costs to end-consumers.
Their earnings are nothing but a guaranteed return on the equity
invested. Hence, the base rate for determining assured ROE and
efficiency parameters adversely affect the reported ROE the most.
The base rate of return is usually fixed for a five-year period. On 1
April 2009, the base rate was changed from 14% (post-tax) to
15.5% (effectively, post tax) and is valid through March 2014.
That said, equity that is deployed under assets under construction
does not earn any return, and since all the utilities have stepped up
their capex plans since 2004, the reported ROE has lagged the base
ROE of 14% (15.5% since FY11) by a significant margin in some
cases.
Old plants of private sector companies such as Tata Power, CESC
and Reliance Infra are also covered by this assured-ROE regime.
Some private sector generators such as KSK and JSPL have moved
away from this assured ROE model, and set up plants that allow
them significantly higher earnings. JSPL’s ROE rose significantly in
FY09, which was the first year of commercialisation of its merchant
power plant.
In addition to the assured returns, utilities are also entitled to earn
incentives if they operate efficiently; from time to time, the regulator
states the benchmark parameters for determining efficiency gains.
Going ahead, utilities would face several macro headwinds that
would affect their profits as well as reported ROE. The key
challenges, among others, are: 1) fuel (coal, gas) shortage, which
influence utilities’ PLFs; 2) low offtake from SEBs, owing to financial
discipline necessitated by their deteriorating financials; 3) low
investments in the distribution sector that may affect evacuation of
power; and 4) falling merchant power prices. Integrated utilities
such as Tata Power will remain largely insulated from these
pressures.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Utilities’ ROEs have been understandably stable, given the dominant
contribution from state-owned utilities that earn assured returns on
(equity) investments made. Stable operating margins and high
leverage drive up ROE—despite low asset turnover whose effect is
exacerbated by high CWIP.
Utilities’ tariffs are largely set on the basis of “cost plus assured
returns”. Under this method, utilities can pass on all the operational
costs (fuel, staff costs, etc) and financial costs to end-consumers.
Their earnings are nothing but a guaranteed return on the equity
invested. Hence, the base rate for determining assured ROE and
efficiency parameters adversely affect the reported ROE the most.
The base rate of return is usually fixed for a five-year period. On 1
April 2009, the base rate was changed from 14% (post-tax) to
15.5% (effectively, post tax) and is valid through March 2014.
That said, equity that is deployed under assets under construction
does not earn any return, and since all the utilities have stepped up
their capex plans since 2004, the reported ROE has lagged the base
ROE of 14% (15.5% since FY11) by a significant margin in some
cases.
Old plants of private sector companies such as Tata Power, CESC
and Reliance Infra are also covered by this assured-ROE regime.
Some private sector generators such as KSK and JSPL have moved
away from this assured ROE model, and set up plants that allow
them significantly higher earnings. JSPL’s ROE rose significantly in
FY09, which was the first year of commercialisation of its merchant
power plant.
In addition to the assured returns, utilities are also entitled to earn
incentives if they operate efficiently; from time to time, the regulator
states the benchmark parameters for determining efficiency gains.
Going ahead, utilities would face several macro headwinds that
would affect their profits as well as reported ROE. The key
challenges, among others, are: 1) fuel (coal, gas) shortage, which
influence utilities’ PLFs; 2) low offtake from SEBs, owing to financial
discipline necessitated by their deteriorating financials; 3) low
investments in the distribution sector that may affect evacuation of
power; and 4) falling merchant power prices. Integrated utilities
such as Tata Power will remain largely insulated from these
pressures.
No comments:
Post a Comment