Budget 2012: Some relief for power cos; JSW Energy, Adani gain

It was a rather lacklustre Budget that Finance Minister Pranab Mukherjee announced today. Practically none of the anticipated policy measures, such as the direct tax code, were announced.

Very little was also done to promote business investments. However, the power sector got a few scraps thrown at it, which is better than nothing.

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In fact, at the start of his speech, Mukherjee pointed out that the Budget had been prepared with five key objectives, one of which was addressing supply-side constraints in the energy sector. He also mentioned the coal and power sector specifically in this regard.

Here are some key announcements affecting both the coal and power sectors:

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• Thermal power plants have been exempted from customs duty for two years.

• The sunset date for projects commissioned until March 31,2013, for claiming 100 percent deduction of profit for 10 years has been extended. Power generating companies can also claim an additional 20 percent of depreciation on new assets acquired in the initial year.

• Power projects can partly finance their rupee debt through external commercial borrowings, which is an attempt to make funds available to companies at cheaper rates.

• The withholding tax on external commercial borrowings has also been reduced to 5 percent from 20 percent. This refers to the taxdirectly paid to the government deducted at the source of loan. The cut will lower the cost of borrowings.

The amount of tax-free bonds to finance infrastructure projects have been doubled this year to Rs 60,000 crore. Rs 10,000 crore will be used for power sector.This is an important measure since most banks have already reached the maximum limit of how much they can lend to the infrastructure industry.

The custom duties on coal mining has also been taken off. Sanjeev Zarbade, Vice President(Private Client Group Research), Kotak Securities says, "This is positive for power producers like Reliance Power and NTPC who can also get into captive mining. They will be exempt from mining taxes."

Most of the measures are positive for independent power producers. However, the exact impact on each company's finances will take time to be understood. At first glance, it seems likeJSW Energy and Adani Power will be big gainers. JSW imports most of its coal, so it will make savings from the removal of import duty on thermal coal.

Adani will also benefit. Adani sells 80 percent of its coal through long-term agreements, which include a clause allowing a price hike because of an increase in costs. It will benefit only in the 20 percent of sales that goes for merchant power.

The impact will be neutral for Lanco Infra and Tata Power since they sell coal mostly through long term agreements.

Moreover, since no additional import duty was announced on power equipment, the Budget turned out to be a disappointment for Bhel and L&T, who were hoping for a duty to fight cheap Chinese imports. Zarbade says, "Overall it works out as neutral to both power equipment producers and generators because status quo is being maintained."

Overall, the Budget will have a neutral to positive effect on power generating companies. However, structural issues in coal remain.