The private power companies such as JSW Energy, Tata Power, Reliance Power and Adani

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Power are expected to see their return on equity (ROE) fall by 4-5 per cent following the hike in coal cess by Rs 50 per metric tonne, and a rise in the minimum alternate tax (MAT) by 3 per cent, according to analysts.

However, company officials believe that the hike in coal cess would get passed on to the customers under power purchase agreements (PPAs), while the merchant power would feel the impact. Krishna Deshika, group chief financial officer of JSW Group, says the hike in cess on coal would impact the per unit cost of power by around 2 paise, which is not enormous and would be passed on to the consumers under the PPAs that the company would sign with its customers. “It is only the merchant power, which would impact the ROE marginally,” he said.

JSW Energy is implementing around 11,000 mega watt (mw) of power projects by 2011 and is in the process of signing PPAs with private players and state governments.

Companies also believe that MAT is a cash flow problem and MAT credit is available to power companies. “Since the power companies enjoy a tax holiday for 10 years, the MAT liability would only arise after 10 years when no exemptions are available,” an Adani Power spokesperson said.

Amit Golcha, who tracks the power sector at Emkay Global Services, said the increase in the MAT rate to 18 per cent from 15 per cent would marginally impact the ROE. "But, this would happen in case of private power utilities only, since public sector companies like NTPC do not pay MAT. Besides, the competitive bidding for coal mines is likely to increase the future coal costs of these utilities too,” he said.

Besides, the hike in coal cess would lead to increase in its cost for private power utilities, which is definitely not a pass through for merchant power producers. “If we assume the companies to bear the additional cost, it would negatively impact ROEs by 2.5-3 per cent,” he said.

Deven Choksey, managing director of KR Choksey, says the fuel cost is a pass-through item for regulated entities such as NTPC, NHPC, Neyvelli Lignite, etc, in India. Thus any rise in the fuel cost will increase the cost of generation of power and consequently increase the average tariff of regulated entities by 2 per cent. This would not affect their profitability and hence the RoEs would not be impacted. “In case of private companies, they would try to pass on the rise in the cost, in the merchant market. But, we believe that the private companies would not be able to fully pass on the hike in fuel cost towards the merchant tariff, which would slightly affect their profitability and hence marginally impact their RoEs,” Choksey said. Similarly, the increase in MAT will affect the cash flow of private companies, as most of the new projects under the Income Tax Act qualify for infrastructure benefit and are, thus, liable to pay only MAT. “However, we believe that the private companies would not be able to pass on the MAT hike, which would slightly affect their discounted cash flow (DCF) valuations,” Choksey said.