The country has installed capacity of more than 20,000-25,000 MW and only 5,600 MW worth of orders got finalized, hence going forward capacity utilization for all power sector players will be less than 25-30 percent. Shortage of orders is more of a problem for the power sector than execution.
Shortage of orders is more of a problem for India's power sector than execution, says MS Unnikrishnan, MD, Thermax.
Most of the larger power projects, especially, in thermal area are already financially closed. In India, execution maybe a challenge, but it is manageable with maybe a couple of days delay or at best maybe a six months delay, he told CNBC-TV18 in an interview.
India has installed capacity in excess of 20,000-25,000 MW and considering only 5,600 MW worth of orders got finalized, capacity utilisation going forward for all power sector players will be less than 25-30 percent, he adds.
Scarcity of coal, rupee depreciation, economic viability and sectoral lending limits that are already exceeded in the banking system for the power sector and major non-performing assets (NPA) are getting in, they are some of the reasons behind the mess in the power sector, says Unnikrishnan.
Another issue plaguing the power sector is the distressed state of affairs of discoms, feels RS Ramasubramaniam, co-chairman, Feedback Infra. He feels that some measures can come in despite the upcoming elections.
Below is the verbatim transcript of MS Unnikrishnan and RS Ramasubramaniam’s interview on CNBC-TV18
Q: Your business is not exactly identical to Bharat Heavy Electricals (BHEL), but you do operate in the boiler, turbine, generator (BTG) space. Can you just take us through what exactly is going wrong in that space? Is it lack of orders? Is it competition? Why are companies like you doing badly?
Unnikrishnan: Thankfully Thermax is not only into boilers. Let us specifically talk about the power sector where there is a high dependency on companies such as BHEL. The power sector had finalised approximately 45,000 MW worth of orders in 2009-10. That year a predominant part of the orders went to China on prices.
The next year it had climbed down to 9,000 MW in the full year and the last year which concluded in the month of March, India finalised only 5,600 MW worth of orders. BHEL as a company has got an installed capacity of around 20,000 MW, of course that includes hydel plus everything put together, but in thermal area I believe they maybe having anywhere from 10,000-15,000 MW of capacity.
Larsen and Toubro (L&T)-Mitsubishi Heavy Industries (MHI) joint venture has got a capacity of 5,000 MW and Thermax Babcock & Wilcox has got a 3,000 MW capacity. So the installed capacity in the country is in excess of 20,000-25,000 MW and when you say that only 5,600 MW worth of orders got finalized, capacity utilisation going forward for everybody can be less than 25-30 percent. So this is a major concern in the power industry.
On one side we have got a power shortage. Peak shortage in the country is almost touching 10 percent and normal shortage is 7-8 percent. Even with an economic growth rate of maybe 6 percent you will have to increase power supply in the country by not less than 6-7 percent. So demand is innately increasing. Unfortunately we are caught in a quagmire as a country.
We had the Indian Electricity Act passed in 2003 and it was supposed to be a public-private partnership (PPP) whereas the Indian government and the people of this country took it as if it is privatisation of electricity. It is not so. Even today, the private companies are unable to participate along will public. So responsibility will rest on the government in terms of passing the Land Acquisition Act, which is lying in the parliament for the past three sessions not seeing the light of the day.
Even in the current status if it is passed it maybe better, but it is not the best of the thing. Second, where is coal available? Predominant part of Indian power is going to come from coal supply and Coal India is unable to increase its coal production and those who are dependent upon international coal supply are paying through their nose with the changes in Indonesian law where they are asking Indians even those who mine over there to pay as per the global rate and rupee having depreciated by almost 20 percent in the last year and half, it will increase fuel prices.
So there is economic viability as a question. Third, sectoral lending limits are already exceeded in the banking system for the power sector and major non-performing assets (NPA) are getting in. I can give a plethora of reasons, but fundamentally the right word to use is we are in a mess as far as power is concerned.
Q: Do you see things improving at all or do you see status quo for affairs in the power sector and therefore capital goods manufacturers for some more time to come?
Ramasubramaniam: One of the positive things that I see about this sector is the fact that the ministry has actually setup a power advisory group from the private sector with which it is interacting. So the positive thing is that the ministry recognises a fair number of things to be done and fundamentally two things that they are grappling with, one as Mr. Unnikrishnan mentioned, issues relating to the fuel situation on coal particularly and the other one is distressed state of affairs of the discoms.
To answer your question, even though we are facing general elections I think that the ministry is at least seized of the issues. They are seized of some 15 points that they are grappling with and it is actually about the bureaucracy getting to grips with it and actually implementing some of these decisions even pre-elections. So I think that some things can happen even with elections staring at us in the face.
Q: You have talked about the point that there is overcapacity in this market. What kind of internal problems do you see now? Is it that new orders are not coming through or wherever there are pending orders in the system and execution is on, do you have issues like receivables which could blow up to be a big problem for companies like yours or BHEL?
Unnikrishnan: Frankly it is more of a shortage of orders than execution. Most of the larger power projects, especially, in thermal area are off-balance sheet special purpose vehicles (SPV), which means it is already financially closed. Once you have got a term sheet signed with the consortium of bankers so long as equity developer is able to provide its progressive equity projects do not get delayed.
In India, execution is also a challenge, but it is manageable with maybe couple of days delay or at best maybe a six months delay. So I do not expect larger projects where the financial closure happens before you supply the first foundation bolt to the site will ever get into trouble unless there are some exceptional circumstances.
Of course it depends upon the company, the developer, the conglomerate of suppliers as to how fast can they execute. Earlier days in India it would take anywhere up to six years for executing a 1,000 MW power plant. Today it has come down to maybe between 40-42 months. It is a practical thing, because construction techniques have improved and there is better quality of construction and maybe mechanical erection capacities available in the country.
Your question related to mounting accounts receivables on the balance sheet of companies, if you delay your projects certainly they will not pay you on time, but otherwise payments do come on time for larger power projects. I do not think there is such a big issue, except the last 10 percent will depend a lot more on your ability to be pooling the performance of the equipment.
Good part of the new orders are coming in for super-critical technology and one should have an ability to have absorbed the technology within the country, manufacture it with high quality, supply it, commission it and then deliver the performance to collect a large part of the payment. So I do not think that could be an issue. Finalisation of order is going to be the big issue. One is public sector.
Even today, the predominant part of Indian power developers are going to be the state generating companies, National Thermal Power Corporation (NTPC), Damodar Valley Corporation (DVC) and equivalent of that in the government sector. In my opinion, in the next 5 years 60-65 percent of the orders finalised in the country in the thermal power area are going to be done by these public sector undertakings. You asked with all the negatives what good is happening, in the past 18 months majority of the State Electricity Boards (SEB) have been able to increase the power tariff varying between 14 percent to almost 60 percent and I am expecting it to continue.
One of the major flaws in the system was that if one were to look at what are the cost of generation of electricity today in the country, it is varying between Rs 2.5-3.5 for a unit of electricity. Average recovery is approximately a rupee lower than what is the cost of generation and distribution put together. Unless electricity distribution companies are able to alleviate the power cost at the hand of the consumer equivalent to at least what is the total expense incurred in generating the power, including the coal prices imported or domestic, it would always be a negative-some game.
This is improving. So with that happening in the next 18 month period, I think Indians will pay for the electricity at the right level. Then onwards there will be commercial viability. There after, if anything can delay it is only in terms of the will of the country. Indians are wanting electricity, India is developing, so we will be having medium to long-term positivity visible.