SEB bailout: Too soon to cheer as other issues remain

Shares of power producers surged in morning trade as market is hopeful that these companies will gain from the government's financial package for loss-making state electricity boards announced on Monday. Key gainers include Jaypee Infratech , Adani Power , Lanco Infratech and JSW Energy , up between 3-4%. However, analysts tracking the sector have warned that it may be too early to celebrate considering that other major issues facing the power sector are yet to be resolved. For instance, power producers are still grappling with coal shortage and land, environment clearance. In addition, many companies are mired in regulatory wrangles after having signed power purchase agreements at rates that now appear unviable. But the bigger question is whether state electricity boards will be more disciplined this time around in raising tariffs and curbing transmission and distribution losses?

A quick look at the doubts voiced by analysts:

Morgan Stanley:

We believe the real benefits of this package will be met only if SEBs improve their financial viability going forward especially through tariff hikes and T&D loss reduction, else this restructuring package may go down the same path as the One Time Settlement Scheme of 2001-03.

Citi:

Other key issues affecting power sector have yet to be resolved. Coal and gas supply remain big concern. Generators like Tata Power and Adani Power have locked themselves into non-remunerative tariffs, which remain legally difficult to modify.

CRISIL:

The desired impact of this restructuring will not be realised unless a broad-based political consensus is achieved to implement the much-needed tariff hikes, a timely and adequate financial support is provided by the state governments, and the discipline of the regulatory process and disclosures is enhanced. Further, there may be a need for some regulatory forbearance for banks if the terms of restructuring involve a loss in net present value (NPV) terms-this loss (estimated at Rs 4500 crore) may arise from the debt that will be converted into state governments bonds.”

Bank of America Merrill:

The key is for banks to enforce the measures and SEBs to keep hiking tariffs to cut financial losses, as AT&C (transmission and distribution) loss reduction targets are far from reality. Real risk is that can states hike tariffs ahead of elections and that such a high tariff hikes may make Indian industry uncompetitive especially if Central Electricity Regulatory Commission (CREC) allows old power purchase agreement re-pricing upwards.