The sector regulator proposed continuation of current incentives. In a positive surprise, the draft note from the Central Electricity Regulatory Commission (CERC) suggests continuation of the 15.5% regulated return on equity (RoE) for generation and transmission companies. The regulated RoE has been maintained despite a noticeable reduction in interest rates. Tariff regulations are set every five years. PowerGrid and NTPC will be in focus.
With more than 90% of PowerGrid’s profits driven by the regulated RoE, it benefits the most. Once commissioned, transmission projects have limited operating risks. So yield and profitability is more intertwined to finance costs and the regulated rate of return. So, while their interest costs have fallen, stable returns means margins will increase.
The scenario is slightly different for NTPC. Apart from the regulated RoE, utilization levels, operating efficiency and scope of cost recovery also influence NTPC’s earnings. Here, the regulator proposed tighter norms for fixed cost recovery on parameters such as fuel inventories and working capital finance cost.
Even so, continuation of the current RoE and the lack of major earnings dilutive measures bring relief for investors. The last tariff regulation changed the basis for incentive calculation from plant availability to utilization levels, making a significant dent to NTPC’s earnings. From this perspective, the proposals are less detrimental and remove a major overhang for the stocks.
But they alone cannot aid the stocks for long. As earnings lagged estimates, the stocks under-performed the benchmark index Nifty over the past year. The key reasons for the under-performance persist, with NTPC continuing to face fuel constraints. The outlook for PowerGrid is weighed down by reducing opportunities in the transmission & distribution segment. The promise of stable RoE notwithstanding, what is crucial is how these companies overcome these challenges.
PowerGrid chart attached (Weekly timeframe) already has indicates formation of bullish scenario for the past couple of months. The long term trend-line from the lows of March 2014 connecting to the lows made during the transition of 2015-16 (October 15 to March 2016) lends support at the current juncture with 38.2% retracement of the overall advance confluence together. Stock therefore has contained with minimal retracement and is poised to show follow-up action higher. The overhead resisting trend-line in price is on a verge of breakout while RSI has broken above the resistance which clearly indicates bullish momentum in formation. Thus, PowerGrid is more poised to challenge the peak zone in upcoming few months.
NTPC has a strong support at 113 this zone has been tested four times from where major moves in the stock has come. Therefore this is one of the pivot points on the charts. 239 is again one of the major resistance for the stock. Fibonacci grid made from these two important points is indicating 161.10 as the 61.8% of the swing and that zone has been broken in the fall of 2008. Break of the zone is an indication that the stock is in a bear trend and hence the stock should be avoided. Since then the stock has been sideways and has lost a decade for investors. During this entire sideways move RSI has been oscillating between 30 and 60-65 which is the bear zone. Therefore the oscillator is also indicating that the trend is down and one should not buy the dips here. Since the stock is in a bear trend the rallies here should be utilized to exit the stock.