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Indian stock market and companies daily report (February 25, 2014, Tuesday)
Indian markets are expected to open on a positive note today following positive start to SGX Nifty and most of the Asian indices.
US markets closed with notable gains on Monday, but well off their highs as stocks gave back some gains in the afternoon session. The strength on Wall Street partly reflected the recent upward momentum for the markets, which has largely offset the sharp pullback seen in late January. The rally according to market participants reflects enormous faith in the Federal Reserve. Meanwhile, Federal Reserve chairman, Janet Yellen is scheduled to testify before the Senate Banking Committee on Thursday after her originally scheduled appearance before the committee was postponed due to a snowstorm in Washington.
Back home in India, domestic markets moved higher on Monday defying an otherwise weak trend across the Asia Pacific region led by continued buying by foreign institutional investors. Looking ahead, trading on Tuesday is likely to be impacted by the release of reports on US home prices and consumer confidence.
The trend deciding level for the day is 20,759 / 6,170 levels. If NIFTY trades above this level during the first half-an-hour of trade then we may witness a further rally up to 20,881 - 20,950 / 6,208 - 6,231 levels. However, if NIFTY trades below 20,759 / 6,170 levels for the first half-an-hour of trade then it may correct 20,690 - 20,568 / 6,147 - 6,109 levels.
CERC Tariff Regulations for 2014-2019
The Central Electricity Regulatory Commission (CERC) has released the Tariff regulations for the central power utilities for FY2015-19E. The ROE level has been maintained at 15.5% with a 0.5% incentive for timely completion; however, the regulations disallow the grossing up of ROE on marginal tax rate and also lay out strict operational norms; similar to the draft regulations. Earlier companies were allowed to retain tax benefits earned from grossing up of ROE on the marginal tax rate which has now been disallowed and the generation company will get tax benefit only on the effective tax rate. Also, there has been a shift from PAF (Plant Availability Factor) based incentives to PLF (Plant Load Factor) based incentives to generation companies. CERC has aimed to further improve the efficiency of generation stations with these regulations though there are some drawbacks for the generation companies. The Final CERC Regulations 2014-19 are very similar to the draft regulations; unlike 2009-14 regulations where there had been a drastic difference between the draft and the final regulations.
Shift from PAF (Plant Availability Factor) based incentives to PLF (Plant Load Factor) based incentives to generation companies: As per current regulations, if the PAF is maintained above 85% the fixed charge goes up proportionately even if there has not been any off-take and therefore the generation companies can recover their fixed costs. However, in the final regulations; and keeping it unchanged from the draft; CERC has changed this to PLF based where the generation company will get an incentive of Rs.0.5/unit of power generated if it maintains the PLF greater than 85%. Even for transmission companies the efficiency norms have been increased from 98% to 98.5% for AC System (99% in draft regulations), from 92% to 96% for HVDC Bi-pole links and from 95% to 96% for HVDC back-to-back station (98% each in draft regulations). This puts the generation companies at a disadvantage because they may have to take a hit if there is no off-take or fuel is unavailable which is due to factors out of their control. We believe this would have a negative impact on NTPC.
Tax arbitrage disallowed: As per current regulations companies are allowed to retain tax benefits earned from grossing up of ROE on the marginal tax rate which has now been disallowed in the final regulations (kept unchanged from the draft regulations) and the generation company will get tax benefit only on the effective tax rate. This will result in companies like NTPC taking a hit on the effective ROE.
Major changes in operational norms:
- The normative Gross station heat rate (GSHR) for 500MW sub critical plants has been reduced from 2,425 Kcal/KWh to 2,375 Kcal/KWh in an attempt to improve efficiency.
- The coal inventory included in calculating the working capital for interest calculation has been reduced for pit-head stations from 1.5 months to 0.5 months and for non-pithead stations from 2 months to 1 month. This is attempted to make the operational norms more stringent.
- Any savings on account of controllable parameters (Station Heat Rate; Secondary Fuel Oil Consumption; Auxiliary Energy Consumption and Refinancing of Loan) will be shared with the consumers in the ratio of 60:40.
We believe that with these regulations CERC aims to improve operational efficiency and have a positive impact on power prices for end consumers. Also, we believe tightening of the operating norms will reduce savings from operational efficiencies for generation companies. Contrary to our as well as street's view the final regulations are very similar to the draft regulations; opposite to expectations of leniency; and therefore have not resulted in any relaxation to the generation companies like NTPC. Expecting these regulations and the uncertainty surrounding them, we have been cautious on NTPC and would maintain our conservative estimates for FY2014E and FY2015E; factoring in a negative impact of 8%-10% on the earnings of NTPC. Currently NTPC is trading at 1.0x FY2015E P/BV. However, keeping our target price unchanged at Rs.146, we would recommend a Buy on NTPC.
Zydus receives final approval for Clonidine Hcl Injection
Zydus Cadila has received the final approval from the USFDA to market Clonidine Hcl Injection 0.1 and 0.5 mg/ml, 10 ml. Clonidine hydrochloride injection is a centrally-acting analgesic solution for use in continuous epidural infusion devices which is indicated in combination with opiates for the treatment of severe pain in cancer patients that is not adequately relieved by opioid analgesics alone. The company now has 90 approvals and has so far filed 216 ANDAs since the commencement of filing process in FY 2003-04. We remain neutral on the stock.
JPA plans to sell its stake in 2 cement units
According to media reports, Jaiprakash Associates (JPA) is in talks to sell its 74% stake in two cement joint ventures to ACC for Rs.2,900cr. JPA has a consolidated debt of ~Rs.60,000cr. The management plans to cut down its debt by Rs.15,000cr and selling its stake in cement units is part of the plan. Since the stake sale will enable the company to reduce its debt, it will be positive for the company. However, we await further clarity from management. We maintain Neutral rating on the stock
Gujarat Gas consolidates its city gas distribution businesses
The Board of Gujarat Gas have approved consolidation of city gas distribution businesses of its group companies. As a part of this consolidation, city gas distribution companies GSPC Distribution Networks, GSPC Gas, Gujarat Gas Financial Services and Gujarat Gas Trading Company will be amalgamated. The amalgamated company will have all cIty gas distribution businesses of GSPC under one roof; hence, there could be some synergies. GSPC had acquired 65% stake in Gujarat Gas during CY2012. Until further approvals by shareholders, we maintain our Neutral rating on the stock
Sanofi India (CMP: Rs.2739/ TP: -/ Upside: -)
Sanofi India, is expected to post sales of Rs.440cr, a growth of 9.8%. The OPM's is expected to come in at 12.5% , an dip of 20bps. On the net profit front, the company is expected to post a merge growth of 1.8% yoy to end the period at Rs.46cr. We remain neutral on the stock.
Economic and Political News
- India's economy to expand by 4.8% in Q3: Moody's
- Private equity inflow in realty sector up 13%: C&W
- Govt IT spending in India to reach US$6.4bn in 2014: Gartner
- LPG supply may hit hard, distributors threaten strike
- Myntra raises US$50mn for expansion
- It's raining discounts as SpiceJet, IndiGo slash fares
- Kinetic Engineering sells its stake in Mahindra two-wheelers for Rs.182cr
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