Power sec­tor's debt woes may con­tinue for 18 months

THE COUN­TRY'S NAR­ROW­ING POWER DEFICIT AND IN­CREASED COAL PRO­DUC­TION MAY NOT BE IN­DI­CA­TORS OF THE END OF STRESS IN THE IN­DUS­TRY

Resource Digest - - RESOURCE DIGEST -

The coun­try’s nar­row­ing power deficit and in­creased coal pro­duc­tion may not be in­di­ca­tors of the end of stress in the in­dus­try. There has been a neg­li­gi­ble change in the power sec­tor’s stressed ca­pac­ity and debt.

Ac­cord­ing to data pub­lished by the Re­serve Bank of In­dia (RBI), the in­fra­struc­ture sec­tor’s share in gross non-per­form­ing as­sets of banks was 13.90 per cent in June 2016, higher than 12.69 per cent in De­cem­ber 2015, and the power sec­tor’s con­tri­bu­tion to these num­bers was 5.97 per cent and 4.99 per cent, re­spec­tively.

“The pri­mary rea­son for stressed as­sets in the power sec­tor is weak de­mand. De­mand has been weak due to muted in­dus­trial ac­tiv­ity, re­sult­ing in ready ca­pac­ity not find­ing long-term con­tracts, ex­ist­ing con­tracts run­ning at low plant load fac­tors and abysmally low spot power rates. Low as­set util­i­sa­tion is mak­ing it dif­fi­cult for power pro­duc­ers to ser­vice debt,” said De­ba­sish Mishra, part­ner at Deloitte Touche Tohmatsu In­dia. Ac­cord­ing to Cen­tral Elec­tric­ity Author­ity data, the plant load fac­tor in Septem­ber na­tion­wide was 58.13 per cent .

Legacy pol­icy is­sues over coal al­lo­ca­tion, low de­mand and banks’ un­will­ing­ness to take hair­cuts in ac­qui­si­tions are some of the other rea­sons for the ob­sti­nate stressed debt in the sys­tem.

“Coal pro­duc­tion has in­creased, but the dis­tri­bu­tion and usage pol­icy con­tin­ues to be re­stric­tive. The de­lay in an­nounc­ing a new pol­icy frame­work is lead­ing to un­cer­tainty,” said Ashok Khu­rana, di­rec­tor-gen­eral, As­so­ci­a­tion of Power Pro­duc­ers.

Khu­rana es­ti­mates the stressed power ca­pac­ity at more than 50,000 MW, stat­ing not much has changed in this num­ber in the last cou­ple of years. This ca­pac­ity, Khu­rana said, lacked longterm power pur­chase agree­ments and fuel-sup­ply agree­ments. “Around 18,000 MW faces un­der-re­cov­ery of fixed or vari­able costs due to var­i­ous rea­sons and dif­fer­ent stages of lit­i­ga­tion,” he said. Mul­ti­ple data points sug­gest stressed debt in the sec­tor may linger.

“Around 17,000 MW of projects, in­clud­ing those fac­ing the con­se­quences of ag­gres­sive bid­ding for coal sup­plies or huge cost over­runs, and those with gas-sup­ply is­sues, are projects where the debt at risk is the high­est to­day. These are projects are not ex­pected to turn vi­able in the long run even if they are struc­tured un­der the 5:25 scheme or any other tool pro­vided by the RBI,” said an Oc­to­ber re­port by rat­ing agency CRISIL.

CRISIL es­ti­mated the debt ex­po­sure to these projects at Rs 70,000 crore. The 17,000 MW was higher than the 16,000 MW the agency es­ti­mated as debt at risk in July 2015. How­ever, the quan­tum of debt in­volved in these stressed ca­pac­i­ties has fallen marginally from Rs 75,000 crore to Rs 70,000 crore.

“The debt sit­u­a­tion will take time to re­solve. One can­not undo the ef­fects ac­cu­mu­lated over the past five years with one year of bet­ter per­for­mance. The debt-earn­ing ra­tio con­tin­ues to re­main high and bal­ance sheets will take some time to delever­age,” said Vivek Jain, as­so­ci­ate di­rec­tor with In­dia Rat­ings. The abil­ity to ser­vice debt with op­er­a­tional cash flow for four of the seven main power pro­duc­ers in the coun­try con­tin­ues to re­main un­der stress with an in­ter­est cov­er­age ra­tio at be­low 1.5 times, Cap­i­taline data shows.

Re­vival in de­mand is likely to be key in im­prov­ing the debt qual­ity and the debt ser­vic­ing abil­ity of power com­pa­nies. How­ever, a re­vival in de­mand may con­tinue to elude the sec­tor for some more time.

“De­mand for power has not re­vived and I do not ex­pect it to re­vive in the next year. Only after the debts of state elec­tric­ity boards are trans­ferred to the books of the state gov­ern­ments will de­mand im­prove,” said Anuj Upad­hyay, an­a­lyst, Emkay Re­search. GBS Raju, chair­man, en­ergy, GMR Group, is hope­ful the sit­u­a­tion will im­prove in 18 months. “Ev­ery plant in the sec­tor has a dif­fer­ent is­sue--a long-term power pur­chase is­sue, a rail­way link is­sue, a trans­mis­sion line is­sue--and has found it­self stranded. Prob­lems are be­ing ad­dressed plant by plant. I ex­pect things to im­prove in the next 18 months,” Raju said.

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