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CESC Ltd is one of the few power stocks that did well last year. Compared with a 9 Percent loss in the BSE Power index, the stock delivered a return of 51 Percent. That outperformance, however, is coming under threat. As markets hit new highs, the stock lost 6 Percent in the past week. Weighing on investor sentiment is uncertainty about fixed costs recovery at CESC’s Chandrapur plant in Maharashtra.

The company synchronized the first unit of the Chandrapur plant in September last year. The plant has a fuel supply agreement. The only impediment is it does not have sufficient long-term power purchasing agreements (PPAs), which can ensure economic viability. Out of 300 megawatts (MW), the company is now selling 200MW to Tata Power Ltd on a short-term agreement. Tariffs are low and the company is recovering only variable costs at the moment, says Antique Stock Broking Ltd. According to the broking firm, an estimated fixed cost of INR 1.75 per kilowatt hour is not being recovered.

For the yet-to-be-commissioned second 300MW unit, CESC has tied up 100MW. But considering that long-term buyers are yet to be found for two-thirds of capacity and the second unit is estimated to get commissioned in one-two months, brokers fear that CESC may face earnings losses if PPAs are not signed in time. “At present, 500MW still remains untied and with discoms (distribution companies) not coming up with procurement bids, there is a risk to earnings, if there is a delay in signing viable PPAs. We have estimated losses of INR 1.1 billion and INR 1.5 billion in FY15e and FY16e, respectively,” Antique said in a note.

Finding electricity buyers in a power-starved country like India should not be a challenge. The problem is that electricity procurers don’t have the cash to pay market rates, even though shortages are acute. Also with elections around the corner, there is a belief that state electricity boards may defer the long-term procurements till a new government takes charge. “Though CESC is looking for opportunities to sign PPAs for remaining capacities, but in case of any delay in signing the PPAs the unrecovered fixed charges of the subsidiary would eventually affect the consolidated performance,” Sharekhan Ltd said in a note. While all these pose significant challenges to CESC, an indication that the company is recovering the fixed costs at the new plant will come as a relief for investors.

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