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MoP issues rules on late payment surcharge

* The Ministry of Power (MoP) has issued a notification on Late Payment Surcharge (LPS). As per the new rules, LPS would be based on one-year SBI MCLR v/s a fixed rate of 18% p.a. specified in the tariff regulations issued by CERC. In the current scenario, this would imply a LPS of 12-15% p.a.

* We note that: a) despite the 18% p.a. CERC specified rate, NTPC is currently charging 12% p.a. on overdue, which are settled under the Atmanirbhar scheme, and b) NTPC’s WC borrowing cost has also declined ~300bp over the past one year, thereby softening the impact of lower LPS rate. The impact on P&L is therefore not significant. We had already baked in lower LPS income (based on 12% p.a.) for FY22E/FY23E and hence leave unchanged our estimates.

* The overdue and LPS situation is a key monitorable, particularly with the Ministry now stepping in to supersede the regulations set by CERC. The new rules lay emphasis on reducing overdue as well, the addressing of which is of prime importance.

MoP’s notification links LPS to MCLR

* The MoP’s notification has linked the LPS rate to SBI’s MCLR. As per the new rules, the rate of LPS would be equal to the one-year SBI MCLR + 500bp. This rate would increase 50bp for every month of delay, with a cap of 300bp. The LPS will be in the range of one-year MCLR + 500bp to 800bp. Currently, SBI’s one-year MCLR stands at 7%, thereby implying a LPS rate of 12-15% p.a. This is lower than the fixed rate of 18% p.a. specified under CERC’s tariff regulations.

* The above does not impact our estimate for NTPC. The company is currently charging 12% p.a. on its overdue (settled under the Atmanirbhar scheme). We had built in LPS income at a lower rate for FY22E/FY23E. The company’s WC borrowing cost has also declined ~300bp over the past one year, thereby softening the impact of a lower LPS rate.

* The MoP has laid emphasis on reducing overdue. The notification calls for: a) settling the LPS amount first during bill payments, (which means DISCOMs cannot shy away from their LPS payments), and b) restriction on short-term purchases in case of overdue of more than seven months. The intent over here appears to provide a mechanism to control the rise in overdue, which is important.

Receivables may hold the key; Maintain Buy

* The MoP’s move to step in and cut the LPS rate, prima facie, does not instill confidence as it reduces the penalty on DISCOMs on such dues. The notification also calls for measures to address the overdue situation. Reduction of these overdue, even at the cost of lower LPS income for NTPC, would be taken positively as it reduces the risk of receivables ballooning. LPS is largely a non-core income for the company and a reflection of the stretch in WC/receivables.

* Over the past one-year, NTPC’s receivables have increased significantly due to impact on DISCOMs’ revenues on account of the COVID-19 outbreak. Power demand continues to recover, which should improve DISCOMs’ revenues. Funds from the Atmanirbhar scheme is flowing through, with NTPC receiving ~INR80b from the scheme. We expect the situation with respect to receivables to improve, which would help ease investor concerns. We remain positive on the stock with valuations at 0.8x FY22E BV and 6% dividend yield. Maintain Buy with a DCF-based target price of INR141 per share.
 

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