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Power Utilities/IPPs - Disappointing Budget
Funding for Ailing Distribution sector cut: The overall budgetary allocation
(excluding capex budgeted by central government utilities such as Power Grid, NTPC,
NEEPCO, DVC, etc) for the power sector has been increased by 11% from INR85.5b to
INR96.4b. A major portion of the budgetary allocation is intended for Rural
Electrification projects. Funding for the government’s Accelerated Power Distribution
Reform Plan (APDRP) scheme, was cut by 21% y-y (comprised primarily of loans to
PFC for APDRP). We are puzzled by the cut considering that the losses of the Power
Distribution Companies (Discoms) have increased significantly in recent years and a cut
in funding for the ailing discoms is detrimental to the prospects of the power generation
and transmission sector. It is even more puzzling considering that media reported that
the government was planning to provide interest subsidies to the discoms. By cutting
funding for APDRP, the government may be signaling that the states will be in a
position to support their loss-making discoms.
No impact from MAT rate hike: The government has raised the Minimum Alternate
Tax (MAT) rate from 18% to 18.5%. However, it reduced the surcharge on taxes from
7.5% to 5%. Including a 3% education cess on taxes and surcharge, the effective tax
incidence of companies paying MAT increases negligibly from 19.9% to 20.0%, which
we believe is not material. Regulated utilities like NTPC and Power Grid can pass on
the increase in MAT, albeit with a lag due to delays in getting clearance from CERC.
Companies selling power under long-term Power Purchase Agreements (PPAs) can
also pass on the increase
SEZ-based power projects to pay MAT: The government has stipulated that all SEZ
developers or manufacturing units within a SEZ, which are currently exempt from
paying any taxes, will have to start paying the MAT. We see this as a negative for Adani
Power. However, there is no downside to our estimates from this change as we were
already modeling a 20% MAT rate for Adani Power starting FY12. Adani Power can
pass on the increased tax incidence to customers for the portion of power it sells under
long-term PPAs. We see no impact on other companies under our coverage.
80IA tax benefits extended for one more year: The government has extended 80IA
benefits by one more year. Under this rule, all power plants starting operations before
31 March 2012 can claim exemption from income tax for any ten of the first 15 years of
operations. This move is in line with market expectations and there would have been
disappointments if Sec 80IA benefits were not extended.
Debt funding prospects could improve: The government has raised the limit for FII
investment in bonds issued by infrastructure companies, with maturities of over five
years, from USD5b currently to USD20b. This will raise the total limit available to the
FIIs for investment in corporate bonds to USD40b. Since most of the infrastructure
companies are organised in the form of Special Purpose Vehicles, FIIs would also be
permitted to invest in unlisted bonds with a minimum lock-in period of three years.
However, the FIIs will be allowed to trade amongst themselves during the lock-in
period. We believe, this will help power companies to possibly refinance their existing
loans from domestic banks with cheaper debt from corporate bonds. This, in turn, would
free up funds for domestic banks to lend to new power projects as currently many of the
banks have hit their internal limits on exposure to the power sector making disbursal of
fresh loans to the power sector difficult. Although interest costs are pass-through for
NTPC, we expect NTPC to take advantage of this using its excellent credit rating and
pass on the benefits to its customers. This would free up domestic lenders to lend to
other power projects.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Power Utilities/IPPs - Disappointing Budget
Funding for Ailing Distribution sector cut: The overall budgetary allocation
(excluding capex budgeted by central government utilities such as Power Grid, NTPC,
NEEPCO, DVC, etc) for the power sector has been increased by 11% from INR85.5b to
INR96.4b. A major portion of the budgetary allocation is intended for Rural
Electrification projects. Funding for the government’s Accelerated Power Distribution
Reform Plan (APDRP) scheme, was cut by 21% y-y (comprised primarily of loans to
PFC for APDRP). We are puzzled by the cut considering that the losses of the Power
Distribution Companies (Discoms) have increased significantly in recent years and a cut
in funding for the ailing discoms is detrimental to the prospects of the power generation
and transmission sector. It is even more puzzling considering that media reported that
the government was planning to provide interest subsidies to the discoms. By cutting
funding for APDRP, the government may be signaling that the states will be in a
position to support their loss-making discoms.
No impact from MAT rate hike: The government has raised the Minimum Alternate
Tax (MAT) rate from 18% to 18.5%. However, it reduced the surcharge on taxes from
7.5% to 5%. Including a 3% education cess on taxes and surcharge, the effective tax
incidence of companies paying MAT increases negligibly from 19.9% to 20.0%, which
we believe is not material. Regulated utilities like NTPC and Power Grid can pass on
the increase in MAT, albeit with a lag due to delays in getting clearance from CERC.
Companies selling power under long-term Power Purchase Agreements (PPAs) can
also pass on the increase
SEZ-based power projects to pay MAT: The government has stipulated that all SEZ
developers or manufacturing units within a SEZ, which are currently exempt from
paying any taxes, will have to start paying the MAT. We see this as a negative for Adani
Power. However, there is no downside to our estimates from this change as we were
already modeling a 20% MAT rate for Adani Power starting FY12. Adani Power can
pass on the increased tax incidence to customers for the portion of power it sells under
long-term PPAs. We see no impact on other companies under our coverage.
80IA tax benefits extended for one more year: The government has extended 80IA
benefits by one more year. Under this rule, all power plants starting operations before
31 March 2012 can claim exemption from income tax for any ten of the first 15 years of
operations. This move is in line with market expectations and there would have been
disappointments if Sec 80IA benefits were not extended.
Debt funding prospects could improve: The government has raised the limit for FII
investment in bonds issued by infrastructure companies, with maturities of over five
years, from USD5b currently to USD20b. This will raise the total limit available to the
FIIs for investment in corporate bonds to USD40b. Since most of the infrastructure
companies are organised in the form of Special Purpose Vehicles, FIIs would also be
permitted to invest in unlisted bonds with a minimum lock-in period of three years.
However, the FIIs will be allowed to trade amongst themselves during the lock-in
period. We believe, this will help power companies to possibly refinance their existing
loans from domestic banks with cheaper debt from corporate bonds. This, in turn, would
free up funds for domestic banks to lend to new power projects as currently many of the
banks have hit their internal limits on exposure to the power sector making disbursal of
fresh loans to the power sector difficult. Although interest costs are pass-through for
NTPC, we expect NTPC to take advantage of this using its excellent credit rating and
pass on the benefits to its customers. This would free up domestic lenders to lend to
other power projects.
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