Power finance cos hail TN tariff hike
Apr 05 2012, 14:18 | By CNBC-TV18
Power finance companies say other states must follow.
Tamil Nadu belled the cat with the State Electricity Board (SEB) hiking power tariff. This is the first time in over nine years that tariff is being increased. This 37% hike comes as a harbinger of hope for the power finance companies such as PTC, REC and PFC that hopes to get timely payments from the SEB henceforth.
CNBC-TV18 caught up with HD Khunteta, director of finance, REC; Harshvardhan Dole, power analyst at IIFL and SK Tuteja of the Shunglu Committee for a discussion on the matter.
The Tamil Nadu SEB owes nearly Rs 9000 crore to REC, while AP and Rajasthan together owe the company Rs 14000 crore. Khunteta expects the other states to follow suit TN with tariff hikes, which he says will improve business for the power finance companies.
“Asset quality will definitely improve,” he says, adding that disbursement growth for the company is likely to grow 20-22% in FY13.
According to Dole, PTC is going to be the biggest beneficiary of the cost hike since that will help the company bring down its working capital.
Tuteja however feels more measures need to be implemented than just tariff hikes. “We need to invite more private investments in the distribution sector,” he says. Tuteja stresses on the integration of technology in the activities of power companies. “Though the tariff hike is a welcome move, SEBs need to do these hikes on an annual basis and not once in nine years,” he says.
On the negative side, companies such as JSW Steel, Lanco and JSPL may see marginal pressure as they have high exposure tot he spot market and spot prices may come down as an effect of the tariff hike.
Below is the edited transcript of the discussion. Also watch the accompanying videos.
Q: Are you encouraged by the tariff hikes or do you think it's a first step and a lot more needs to be done for SEB’s to fix their problem?
Tuteja: It is very encouraging, but two more important things need to be done. One is the integration of technology in the activities of power distribution companies. Whether it is consumer friendly approach or whether it is a question of metering, all this needs to be done in a more transparent and with no default activity. The second is that they definitely need to address the question of inviting more private investment into the distribution sector. The franchisee model, for example, is one such thing which needs to be taken care of. All the three needs to be done and rate increase is one of the factors. Obviously, all this is intended only for that limited purpose that is how they reduce their distribution and transmission losses.
Q: Part of the mandate that was set out was that some of the state regulators could go ahead with these price increases on an annual basis. Are you confident that that kind of move can actually take place? Is it looking more like an ad hoc move by Tamil Nadu of moving 37% and then they’ll see how it goes or do you think this can be sustained over the next couple of years every year?
Tuteja: That is precisely the objective, that is why the act provides for preparation of an annual business statement, annual resource statement. The regulator is then supposed to determine the increase or no increase. That point will depend upon the financial position of the company. But more importantly, it has to be done on an annual basis.
Q: What about the accumulated losses? While this will improve the cash flow clearly the raising of the tariffs do you think you need to see far more action in terms of restructuring of loans, may be a far bigger line of support from the states themselves in their budgets to deal with the accumulated losses which stand on their books?
Tuteja: The accumulated losses are a problem that, as we mentioned in our committee, needs to be addressed in two ways. One evolves this question of restructuring of loans which is linked to certain parameters. One of the parameters was that there will be a revision in the rates. This will enable the distribution companies in two ways, firstly their liquidity position and secondly, it is definitely now going to attract more private investment in the distribution activity.
The other point that we should not miss in this is that if it happens across the board in all the states, then the accumulate loss of Rs 80,000 crore would get restructured. But if it does not happen then it will not get restructured. You appreciate the concerns of the lenders are also there. They are willing to consider a restructuring, provided they see the light that yes the restructured money will come.
Q: Has any plan being worked out with these lenders in terms of restructuring, how it could be done, what kind of compensation or relief could be provided to them?
Tuteja: We had said in that report that restructuring will be done on case-to-case basis by the state government and distribution company with the lender concerned. If after two years of that, there is a situation, then we had suggested a special purpose vehicle (SPV) to take care of this. The basic point is that restructuring in any case will get linked to their effort to raise their income and to reduce their losses.
Q: Khunteta, you have seen this as a welcome move the fact that so many SEBs have been able to raise tariffs but if you could outline for us how materially does it impact the company like REC? Is it to do with asset quality primarily or can you think about better growth in terms of more orders etc because of more financially viable SEB?
Khunteta: Assets quality will be better otherwise chances of default were there in case they do not increase their tariffs. Now that Tamil Nadu has increased their tariff by 37%, other states like Bihar, Orissa, Andhra Pradesh, they have also increased their tariffs in the range of 12-25%. So it will definitely improve cash flow.
For example, in case of Tamil Nadu, additional cash flow on account of increase in the tariff will be around Rs 8,000 crore. They will be in a position to discard their obligation on account of procurement of power as well as repayment of loan and interest payment. So this is a good development, and for REC, PFC and other financial institutions, it is a good thing; at least the quality of assets will be maintained.
Regarding other states also, four states have done and Rajasthan, UP and other states will also do. So I am more concerned about the quality of assets. As far as growth is concerned, that will definitely come because under the PDR scheme which is the scheme around Rs 50,000 crore where 50% of the loans will be converted into grant. The whole objective is to roll the losses to 15%. Most of the amounts will be spent in the current year and next year. So that demand will also be there. We are expecting to have disbursement growth in the range of around 15-22% in the current year. Definitely, growth will be there and the quality of assets will also improve.
Q: What the exposure is for REC to states such as Andhra Pradesh and Tamil Nadu, what the total quantum was and how much relief you get on that front because the expectation was that some of these states may have gone on to do NPA category for you?
Khunteta: As far as Tamil Nadu is concerned, the total outstanding is Rs 9000 crore including Rs 2000 crore to their transmission company. Andhra Pradesh, the outstanding are around Rs 6000 crore and Rajasthan also it is around Rs 8000 crore. UP is around Rs 6000 crore and none of the states have departed far. There may be a stance when delay of around 10-15 days or 20 days have happened in the month of February or March, but finally on March 30th, they have made their payment of all the dues. So all payments have been received and chances of becoming NPA are very least on account of a recent increase in the tariff or likely increase in tariff by other states also.
Plus, we have also put the condition that the in case of free power supply or where power supply is subsidized, the state government has to make the payment in advance. So their cash flow should not be affected. Both together will ensure that their cash flow where the outflow on account of payment of interest, repayment of loan or expenses or procurement of power should be at least equal to the cost of input. Thus they will be in a position to discharge their obligation on due date.
Q: In the listed space which company in your eyes stands to benefit the most from the kind of re-pricing that we are seeing now?
Dole: The re-pricing clearly benefits someone who has been supplying power to these loss making discoms and has seen substantial expansion in their working capital. So far, if I were to screen out the companies, I think PTC which is the largest power trader has seen substantial expansion in its working capital over the last 12 months and liquidation or rather restoration of working capital should benefit PTC the most.
In addition to this, there will be certain smaller and medium size listed/unlisted power developers, particularly in the wind side, Tamil Nadu has been holding back payment to a lot of wind generators. So they should also see their working capital coming down to normalized level over the next 8-12 months. I think not only from Tamil Nadu, but re-pricing of power which has been happening all over India over the last 12 months should structurally ensure that the liquidity in the system improves, the power trading volumes improve, generally the availability of power improves and the benefit is passed on to the end-users.
Q: Any companies that you think may be potentially impacted negatively because there is a fear that spot sales may actually go down. For pure power companies, anyone who stands to loss because of this?
Dole: Certainly, the intent of the regulatory commissions when they pass on the order is to cut down the extent of spot purchases or the purchases of informed power from the exchanges. That will actually encourage the buyers as well as sellers of power to get into medium/long term contracts, and that in a way, is indirectly beneficial to not only the gencores but also the lenders and the buyers of the power because predictability and cash flows will come down. So far, if I were to screen out the companies which could get negatively impacted if spot purchases could come down and they would align themselves to more long term contracts, of course someone like a JSPL or a Lanco or a JSW Energy which has got sizeable exposure to the spot market will come down. But these companies have been planning to tie up power on a medium term basis as their long term strategy.
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