Government of India late last week announced a reduction in effective corporate tax (including surcharges and cess) to 25.17% (earlier 34.94%) and the effective MAT rate to 17.47% (earlier 21.55%). The impact of these cuts is likely to be positive for the power sector as cashflows of the entire value chain will improve. The biggest beneficiaries will be discoms, where annual savings resulting from the cut are estimated at ~Rs40bn, while benefit for most other companies will be limited as the regulations call for passing of the tax to consumers. As most companies are currently under MAT, a small amount related to tax on incentives and other income will be retained by the companies on cost-plus basis while tax benefit on core income will be passed on. On the other hand, renewables and private transmission companies (mostly with TBCB projects) are expected to gain as their NPVs/IRRs will improve by ~7%/100bps.
Top picks: Power Grid (TP: Rs250/share) and NTPC (TP: Rs168/share).
Beneficiaries of discom profit improvement: Torrent Power (TP: Rs320/share), CESC (TP: Rs892/share), Tata Power (TP: Rs87/share).
· Impact on NTPC: We expect NTPC’s earnings to increase by ~Rs2.5bn from FY20E onwards (2% increase from our estimates), which is primarily contributed by savings on income from incentives and other income.
· Impact on Power Grid: Impact on Power Grid is limited to gain of ~Rs2.5bn per annum (2.5% higher than our estimates) mainly due to savings on incentives, profit on telecom and consultancy, and lower tax outgo in the TBCB projects.
· Impact on Torrent Power: Torrent will witness an earnings upgrade of ~2% mainly from its renewable portfolio and Bhiwandi and Agra distribution franchise as both were based on bidding (contributing ~40% of profits), while the rest 60% from regulated businesses have limited impact only on the incentives earned by SUGEN.
· Impact on Tata Power: As per our estimates, Tata Power will benefit by ~2% on FY20E estimates due to savings in its renewable portfolio (earned PAT of Rs4.3bn in FY19) and also make small savings in IEL and Haldia projects. Bulk of the tax paid on profits is for the Indonesian coal mines, on which status quo will be maintained.
· Impact on others: Impact on other companies such as JSW Energy and CESC will be negligible as more than 80% of their profits come from regulated businesses, which will be passed on to the consumers.
· Impact on Coal India: Coal India was in the highest tax paying bracket with an effective tax rate of 35.62% in FY19. There will be a significant increase in the PAT (up 14.2%/15% for FY20E/FY21E) with its effective tax rate now reduced to 25.2%.
· Overall impact on the power sector: Discoms are expected to be the biggest beneficiaries with annual savings estimated at ~Rs40bn as tariffs will be lowered for all cost-plus assets. Renewables and private transmission companies (mostly with TBCB projects) are also expected to benefit substantially. Since, as per regulations, significant portion of the tax benefit will have to be passed on to the consumers, only a small portion related to the benefit on incentives and other income will be retained by the companies on cost-plus basis.
· We have not changed our estimates yet as we await clarity from the companies on the exact impact as different businesses attract different tax rates and almost all the companies have availed of benefits under 80IA. However, we have increased our estimates for Coal India as the company was paying full tax, but we have not revised our target price as we value it on EV/EBITDA basis. However, the key thing to note is that the tax reduction provides Coal India significant room to pay higher dividends in FY20E (Rs13.1/sh was paid in FY19).
Please find attached report.
“Print this mail only if absolutely necessary. Save Paper. Save Trees.”
“The information contained in this e-mail and any attachments to this message are intended for the exclusive use of the intended recipient and may contain proprietary, confidential or legally privileged information. If you are not the intended recipient, please note that you are not authorised to disseminate, distribute or copy this e-mail or any parts of it or act upon/rely on the contents of this e-mail in any manner. Please notify the sender immediately by e-mail and destroy all copies of this e-mail and any attachments. Please also note that ICICI Bank or its subsidiaries and associated companies, (collectively”ICICI Group”), are unable to exercise control or ensure or guarantee the integrity of/over the contents of the information contained in e-mail transmissions and that any views expressed in this e-mail are not endorsed by/binding on the ICICI Group unless the sender does so expressly with due authority of ICICI Group. Before opening any attachments please check them for viruses and defects and please note that ICICI Group accepts no liability or responsibility for any damage caused by any virus that may be transmitted by this email. Thank you for your cooperation.”
Source: icicisecurities
