Capacity addition in power to slowdown in 2012: Fitch

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Capacity addition in power to slowdown in 2012: Fitch

Fitch Ratings has come out with its outlook on Indian Power. The rating agency expects the power sector reforms - required to restore the financial viability of state power utilities (SPUs) - to gain traction during 2012.

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Fitch Ratings has come out with its outlook on Indian Power. The rating agency expects the power sector reforms - required to restore the financial viability of state power utilities (SPUs) - to gain traction during 2012, though the timely and consistent implementation of Shunglu Committee recommendations over the medium term could remain challenging.

Tariff Reforms: Risk of too little too late

Rating Outlook
Stable Outlook: Fitch Ratings outlook on the rated power sector entities is stable. Fitch expects the sector to face fuel shortages in 2012, remain exposed to fuel price risk and structural issues in state power utilities (SPUs). Fitch-rated entities are expected to manage these issues due to implied and tangible support from the central and state governments, strong liquidity and favourable tariff mechanisms.

Utility Reforms Unavoidable: The weak financial health of SPUs prompted the central government to initiate structural reforms that are unavoidable to restore viability of the distribution companies (discoms). Fitch believes timely and consistent implementation of Shunglu Committee recommendations over the medium term could be challenging.

Weaknesses in Regulatory Mechanism: Regulatory mechanism for existing power plants will provide full cost recovery and reasonable return on capital. Regulatory framework for distribution utilities though present is marred due to political interference in tariff fixation and operational inefficiencies on the part of discoms. Improvement in the credit profile across the value chain rests on the strengthening of regulatory mechanism for discoms.

Fuel Risks High: Fitch believes domestic fuel availability will be low compared with the rising demand from power projects due to environmental and land issues faced by the largest domestic coal supplier. This should lead to increased reliance on imported coal for fuelling the additional power capacity; however, the cost of imported coal and boiler design will play an important role in deciding the overall use of imported coal and hence the overall capacity that can be commissioned.

Capacity Addition to Slowdown: Launch of new generation projects will slow down in 2012 because of lower investor interest over fuel availability, softening of merchant power prices, higher fuel costs, higher interest rates and slow progress on reforms at the distribution level. Access to capital will be restricted for weaker entities including SPUS and greenfield projects.

Concentration Risk: Power sector-specific financial institutions such as Power Finance Corporation Limited (PFC, 'BBB-'/Stable) and Rural Electrification Corporation Limited (REC, 'BBB-'/Stable) will meet greater part of the sector's debt requirements. Near 100% historical recovery rates lend stability to credit profiles of REC and PFC despite their high sector concentration risk. Deterioration in financial profiles of SPUs leading to slippages in recovery rates of REC and PFC could affect them negatively.

What Could Change the Outlook
Sponsor and Sovereign Ratings: Any change in the respective government's rating outlook could lead to a similar change in its owned companies' outlook.

Slow Reform: Uncertainty over timing, extent and implementation of the expected reforms and gradual pace of recovery after obtaining tariff increases through the regulatory mechanism and restricted access to the banking system could result in a change of outlook to negative from stable.

Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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