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CERC relaxes late payment surcharge
Late payment surcharge at 12% pa for over dues b/w 24th March–30th June
* The Central Electricity Regulatory Commission (CERC) has reduced the rate of late payment surcharge (LPS) to 12% pa (v/s 18% pa) for over dues payable between 24th March–30th June 2020.
* The reduced rate is applicable only on over dues (>45 days) owed for and during this interim period. Past over dues would continue to earn 18% pa.
* The announcement comes following the Ministry of Power’s directive to state and central regulatory commissions not to levy LPS, given the liquidity issues being faced by distribution companies (DISCOMs) due to the COVID-19 impact.
* We note the CERC order is applicable only on central and inter-state generation stations and transmission licensees. State electricity regulators (SERCs) would likely introduce their respective rulings.
NTPC: P&L benefit to continue to accrue; receivables may be stretched
* DISCOMs’ over dues to power generators have risen (Exhibit 1), with the current situation further limiting their ability to repay these dues. Following the announcement of the country-wide lockdown, India’s power demand has witnessed 25–30% YoY decline. The plunge has been witnessed due to slowdown in the operations of Industrial and Commercial consumers, which are high-paying, cross-subsidized customers. As a result, DISCOMs’ cash position is expected to be impacted. Accordingly, such over dues are likely to increase.
* CERC regulations, however, penalize DISCOMs on such over dues (dues > 45 days as per current regulations), making them liable to pay LPS to the respective generators.
* In fact, from NTPC’s perspective, the existing over dues situation has, rather strangely, had a positive impact on its P&L statement. NTPC is entitled to late payment surcharge of 18% on these over dues v/s its borrowing cost of 7.5%. This implies a 10–11% positive impact on net interest income. Thus, reduced LPS of 12% pa still implies a positive 4–5% benefit.
* NTPC’s current over dues may decrease at the end of FY20 given the bill discounting (as implemented in recent years; refer to Exhibit 2). However, we expect NTPC’s over dues to rise during April–June as cash issues persist at DISCOMs. The Ministry of Power has directed for a 50% cut in the payment security mechanism requirements of DISCOMs, thereby providing them some latitude for possible lower payments, without forcing the curtailment of power supply.
* Our FY21E builds in a late payment surcharge income of INR18b. Possible default on discounted bills and an extended period of lower demand, resulting in cash issues for DISCOMs, could stretch the over dues and LPS (Exhibit 3).
No significant impact on CERC regulated players’ business model
* CERC’s directive allays fears of a possible non-levy of LPS in the current scenario. It considers the working capital (WC) impact on generation and transmission companies and upholds the need to be compensated for the same through LPS, which is a positive. We note the regulator has considered existing tariff regulations when planning the reduction in LPS to 12% pa, largely mirroring the rate of normative working capital (MCLR +350bps).
* Given the nosedive in power demand, we expect WC/cash issues to arise within the power sector value chain. However, regulated entities guided by the CERC framework (NTPC, Power Grid, NHPC) remain relatively insulated to external demand and are being compensated for such a stretch in receivables. Amid the recent fall in the stock prices of NTPC and PWGR, one-year forward valuations (NTPC P/BV: 0.6x, PWGR P/BV: 1.2x) are near an all-time low. We remain Buyers of NTPC (TP: INR146/sh) and PWGR (TP: INR229/sh). Given the relative stable and regulated nature of such businesses, we foresee little impact on their existing earnings base.
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