Lower tax outgo, costs may save the day for power

Power generation companies have been the key beneficiaries in this Budget. Extension of 80IA benefits for one more year, cut in customs duty and Counter Vailing Duty (CVD) on coal, the opening up of ECB (external commercial borrowing) re-financing for existing projects and allowing ‘initial depreciation' of 20 per cent along with normal depreciation, are key positives for the sector.

That the government didn't hike the import duty on power equipment by 14-19 per cent as demanded spells relief for companies setting up power projects. The majority of the private power producers including Reliance Power, Lanco Infratech, Adani Power, Jaiprakash Power Ventures and Sterlite Energy have placed orders for such equipment and would have been impacted.

The availability of tax holiday for projects commissioned in 2012-13 will benefit several projects which missed their targets for commissioning in this Plan period. Tata Power ultra-mega power project, Adani Power's Mundra and Thiroda plants, Reliance Power's Sasan UMPP will be among the beneficiaries due to this extension.

About 18,000 MW of such projects from the 11{+t}{+h} Plan and a chunk of 58,000 MW of the 12th Plan projects are expected to be commissioned during 2012-13. These projects will enjoy lower tax incidence for the next ten years.

All projects in power generation and distribution will be allowed ‘initial depreciation' of 20 per cent for the first year in addition to the normal depreciation. This will reduce tax incidence and improve return on capital.

Duty cut relief

Indian power companies may import around 35 million tonnes of coal or 8 per cent of their coal requirement this fiscal with import expected to further rise over the next few years. Mindful of this, customs duty has been cut to nil and CVD to 1 per cent on imported coal.

At $80 per tonne of coal, the savings in customs duty and CVD would translate into savings of 15-16 paise per unit of variable cost of power. Many coastal projects and projects with no fuel linkages will benefit from this cut.

Adani Power, Tata Power, Reliance Power, JSW Energy, and Lanco Infratech are likely beneficiaries. However, this benefit will only be available for the next two years.

Borrowing relief

Given the leveraged nature of the power projects, the go-ahead to part-financing of rupee loans with external commercial borrowings will significantly reduce interest costs for operational power projects.

For instance, for a project finance loan, a domestic infrastructure financing company typically charges 14 per cent interest for private companies. They can raise the same funds at Libor plus five percentage points from overseas. Without accounting for hedging costs, the interest rate would work out to less than 6 per cent.

With withholding tax on the interest payout on overseas loans reduced, power companies may be able to strike better deals with foreign banks. Financing especially from Chinese banks is on the rise during the recent times.