SEB reform long term positive for power cos: Credit Suisse

With the central government set to come out with a financial package for loss-making state electricity boards, Amish Shah of Credit Suisse feels the move will help power generators improve their working capital cycle as they can now hope for timely payments from their customers (state electricity boards). He, however, says it won’t make any big difference to the earnings or valuation of power companies.

According to Shah, what is more important at this stage is resolving fuel shortages and addressing the PPA (Power Purchase Agreement) renegotiations, which have been dragging on for a while. “It requires a lot of reforms on that side and we don’t believe that these reforms are likely to be continued at least in the near term. Those are difficult reforms where you need to step up Coal India's production growth and augment railway infrastructure. We think PPA renegotiation will be time consuming as well,” says Shah. Also Read: FIIs are back; PSU banks can rally 15-20% more: Emkay Below is the edited transcript of the interview Q: Do you expect to go positive on any of the power companies on the ground that the SEBs will be better able to pay money and buy power? A: Certainly this step is positive on the power companies from a long-term view point. It ensures that balance sheets of SEBs improve, and going forward, they become commercially viable because they will be forced to take more frequent tariff hikes and reduce their ATMC losses. But if you really see from the power generators’ view point, this really means an improvement in their working capital cycle, which doesn’t increase the earnings and valuation materially for the sector. What we would expect more to change is resolution on fuel shortages issue and a resolution on the PPA (Power Purchase Agreement) renegotiations, which have been dragging on for a while. It requires a lot of reforms on that side and we don’t believe that these reforms are likely to be continued at least in the near term. Those are difficult reforms where you need to step up Coal India’s production growth and augment railway infrastructure. We think PPA renegotiation will be time consuming as well. Q: Even the tariff regime has to become a little more transparent and this whole issue of giving subsidies, distributing free power etc has to come to an end. With respect to the SEB tariffs, what is your view on how much they could be hiked further from here? A: You rightly pointed out that it needs to be done in a transparent manner. As far as the law goes, that mechanism is already in place. So the system is that every year, SEBs file for tariff petitions, and according to that, the regulators are supposed to give them tariff hikes which should go through. The law is in place, it is just that it is not implemented on the ground. With this SEB restructuring scheme that has been proposed, it is being planned to be enforced. Obviously if you ask me whether this could really change anything, it could. But at the end of the day, the key question that we need to ask is whether the political mindset has changed to ensure that the SEBs are run on commercial viable principles rather than through political interferences. Till that attitude doesn’t change, no reform is likely to be effective. Remember, even this particular scheme is a voluntary scheme so it still needs to be seen how many state government or lenders opt to go for it. Q: More important are the PPA issues, the CERC may take a benign view but this is a legal document. Do you think that we can see renegotiation, and therefore, some relief for the likes of Adani, Tata Power and JSW who are stuck. Will you buy them on the ground that relief is there sooner or later or do you think that’s an even tougher call to take? A: Based on our meetings with the regulators, lawyers and the recent opinion of the Attorney General of India, it seems to us that eventually PPA renegotiations would go through. But in our view, this will be a time consuming process because whatever the CERC says is most likely to be litigated. It would then have to be settled through the process of courts, which obviously will be time consuming. The projects that you mentioned and even the projects that stake holders are currently evaluating for PPA renegotiations are only the imported coal based power projects, which were impacted on account of Indonesian government changing its regulations since September 2011. If the government allows for pass through for change in a foreign law then only the imported coal based power projects benefit out of that. But it still needs to be seen if the governments also take into account PPA renegotiations for domestic coal based power projects where developers have already submitted a tariff because of domestic coal shortages they are not viable at these tariffs. They, therefore, want the tariffs to be renegotiated upwards.