Rajasthan operations may turn profitable in 18-20 months: CESC

CESC in May had won bids for distribution and supply of electricity for two cities in Rajasthan – Kota and Bharatpur. The company is now set to begin power distribution in Kota and Bharatpur from August. It has formed two special purpose vehicles (SPVs) for Rajasthan projects.Sanjiv Goenka, Chairman, CESC in a press conference on Wednesday, said they expect to garner around Rs 750 crore from Rajasthan operations and are committed to a capex of Rs 150 crore.Throwing more light on the above development, he told CNBC-TV18 that he was confident of halving the transmission and distribution (T&D) losses and expects the project to turn profitable in 18-20 months. According to him, returns would be proportionate to investments made.In FY15, the Kota T&D losses stood at 29.71 percent and that of Bharatpur at 27.43 percent.He is very upbeat about the Ujwal Distribution Assurance Yojana (UDAY) scheme and going forward he sees a lot of bidding opportunities for them.Below is the verbatim transcript of Sanjiv Goenka’s interview with Mangalam Maloo & Reema Tendulkar on CNBC-TV18. Mangalam: Could you tell us how much does this narrow your transmission and distribution (T&D) loss we understand it is anywhere between 27-29 percent which is much higher than your average 12-13 percent so, this commencement how much does this narrow your T&D loss by? A: We do believe that we could halve it in the first couple of years. Subsequently, reduce it even more as we go along. We do believe that there is an opportunity to reduce the O&M cost there. I think with smart metering and technology we expect to make major difference in that region. It is with this confidence that we have decided to go ahead and bid and we won it. Reema: We were listening into your press conference where you indicated that the revenue growth or the revenues on account of this particular development will be Rs 750 crore in year one or per annum? What will be the profit impact on you at margin level as well as on the bottom line? A: Year three would definitely be a profit; year two onwards should start trending towards a profit. I think it will probably take us about 18 to 20 months to get to positive numbers. Mangalam: You already have a commitment of CAPEX of about Rs 150 crore in this business in the first year itself apart from this can you tell us the CAPEX plans of the company as a whole in the near future? A: Rs 150 crore is what we intend to spend but our commitment in the first year is not Rs 150 it is significantly lesser. However, we do believe if we made that kind of investment upfront we would get returns much faster. A large part of it will go in terms of smart meters and things like that. We do believe that the returns of that will come very quickly and will be directly proportionate to the investment. Overall the company has major investment plans. We are spending significant amount in the distribution zone in Calcutta. Over the next three years that is going to be about Rs 3,000 crore and we will be looking at other distribution franchises as and when they come up. We do believe under the Ujjwal Discom Assurance Yojana (UDAY) scheme there will be lot of opportunities and we will bid for them, as and when they come. Reema: Could you tell us what is the tariff that you anticipate in Rajasthan both Kota as well as Bharatpur what do you bid for? A: The bidding was on the basis of the input price and our bid was 4.267 for year one. Reema: Is that all you need to bid or did you have to put in for subsequent years as well. Take us through your inputs? A: The levelised tariff is about 4.48. Mangalam: Earlier in the answer you did allude to the fact that you are investing in T&D in and around Calcutta itself and that you will benefit from the UDAY scheme. On that itself if you could tell us something about the Chandrapur power purchase agreement (PPA) because I believe a apart from the 300 megawatt which has been signed in a power purchase agreement what is the update there, are you looking to sign any, is there a confirmation any you can give to us? A: Fundamentally, we have about 300 megawatt that we have signed up and we have got finally the section 62 clearance from the Uttar Pradesh (UP) regulatory authorities. So, now we just need the clearance from the transmission network and hopefully we believe in the next two to three months supply can actually start. So, once you got 50 percent of your capacity taken care of you actually get to breakeven. Thereafter it is a question of finding either in the merchant market or PPA for the remainder 300 and that those dialogues are on. However, in the power field it takes a long while but I think the positive step is that from losses you will get to breakeven. Reema: Once you breakeven you are saying that in year three for sure the company it will be a profitable venture for you. So, say in year three what will be the EBITDA margins that you can enjoy on this? A: You are talking about Chandrapur? Reema: I am going back to the Rajasthan issue where you said that 18-20 months you are guessing you will turn profitable but for sure year three if not year two you will be profitable. So, once this venture, this Rajasthan power distribution turns profitable what would be the margins that you can enjoy? A: The first year of profitability we probably see about somewhere between 5-7 percent margins at the net level. Going forward it will increase. It will depend upon with what speed we can actually do metering, we can reduce O&M cost, we can control theft. We have done it well in Calcutta; we have done it well in Greater Noida. So, we do believe our experiences in these two zones will help us in Rajasthan. The Rajasthan government seems committed to very progressive path forward. We do believe we will get cooperation from them. If we have cooperation from the local authorities it could happen faster. Mangalam: Since we have you with us also wanted a status update on the coal levy of Rs 1,000 crore. You have been saying that this is recoverable and will be used as a pass through. When can we hear a judgement on that from? A: I wish I could answer you very specifically on this. The legal position remains what it is which is very strong. I think in terms of practical implementation I don’t know whether I could actually forecast a time. Reema: Let me comeback to the power distribution business. You said that you would be open for bidding for more power distribution in other states via the franchise route. Any more bids opening up in the near future? A: I do believe there will be other bids which will come in the next 12 months. There will be more than one such bid. Reema: Which states? A: It is really not me to say which states but I think you will see some of the more progressive states doing this. You will see a multiple cities in each state coming up. So, there will be enough opportunities for everyone. There is a question of whether you can get the right ones or not. Mangalam: A word on the fact that the cabinet has approved the new UDAY policy wherein the late entrance will be given a longer rope and it will benefit them itself. What is your sense on this how will this benefit the industry and specifically CESC itself? A: Overall, we are very enthused by this steps the government is taking, the proactive measures they are taking in terms of changing the way business is done, opening up the economy. Actually, proactively going in for different things from aviation to power to smart cities to etc. We do believe overall the economy is poised for growth and you will start seeing the growth coming in, in the next couple of months and it will start beginning to trickle in and hopefully it should be a very steady progressive climb upwards.