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India Utilities
A Tale of Three SEBs
Quick Comment: Increasing losses and deteriorating
financial health of State Electricity Boards (SEBs) is a
much talked about topic and was one of the key worries
voiced by investors during our recently concluded
annual power trip. As per a PFC report, SEB losses
aggregated to Rs526bn in F2009 (excluding subsidies),
an increase of Rs205.6bn over F2008. Of the 30 states
surveyed, 14 states were significantly in the red;
however, the important point to note was that three
states accounted for 69% of the incremental losses.
These states were Andhra Pradesh, Tamil Nadu and
Rajasthan (Exhibit 2). On the contrary some states such
as Gujarat showed a reduction in annual losses.
In our view, some of the key reasons that led to weak
performance of these three states were as follows:
1. Mismatch between increase in cost of supply and
tariff revision. Tamil Nadu had not revised tariffs for
seven years while Rajasthan had not revised for five
years. This is in stark contrast to Gujarat where tariff
increases tracked cost inflation in F2007, F2008
and F2009 (Exhibits 3-6).
2. The Agricultural sector was either provided free
power (such as Tamil Nadu) or tariffs had not been
increased for years (Andhra Pradesh agricultural
tariffs were static while in Rajasthan they were down
4-7% between F2007-09). Gujarat on the other
hand increased agricultural tariffs by 32-56%
between F2007-09.
3. Trends in industrial tariffs too were weak with
Andhra Pradesh and Tamil Nadu showing a decline
of 1-2% between F2007-09. Rajasthan industrial
tariffs were up 4% in the same period. In contrast,
Gujarat had revised industrial tariffs up by 8-9%
between F2007-09.
Key points to highlight for the three SEBs are as follows:
Andhra Pradesh
• The gap between cost of supply and tariff increased to
Rs1.25/unit in F2009 from Rs0.48/unit in F2008. While
cost per unit increased at 20% CAGR between
F2007-09, tariffs went up by only 4%, resulting in a
significant mismatch.
• Average agricultural tariffs in the state were as low as
Rs0.08/unit while industrial tariffs were around
Rs3.6-3.7/unit. While agricultural tariffs were largely
static, industrial tariffs declined by 2% between
F2007-09, despite inflationary pressures.
Tamil Nadu
• The gap between cost of supply and tariff increased to
Rs1.38/unit in F2009 from Rs0.77/unit in F2008. While
cost per unit increased at 16% CAGR between
F2007-09, tariffs remained static.
• Tariffs in Tamil Nadu had not been revised for seven
years. Interestingly, the state also ruled out any tariff
revision in F2010 as the industries had not recovered
from the economic recession.
• The state supplies free power to the agricultural sector
which is subsidized by the state government. Industrial
tariffs on the other hand, were down 1% between
F2007-09.
Rajasthan
• The gap between cost of supply and tariff increased to
Rs1.98/unit in F2009 from Rs1.04/unit in F2008. While
cost per unit increased at 28% CAGR between
F2007-09, tariffs increased by only 6%.
• The distribution companies in Rajasthan had not filed
any tariff revision petitions with the state electricity
regulatory commission since 2004.
• Agricultural tariffs were down 4-7% between F2007-09
while trends in industrial tariffs were mixed with two (of
the three) distribution companies showing a 0-2%
decline while the third showing a 14% increase
between F2007-09.
Conclusion: Our key thoughts on the topic of SEB losses
are as follows:
• The deterioration in financial health of SEBs is limited
to a few states and not spread across all the states with
a few states contributing to a large increase in losses.
States such as Gujarat have shown an annual
reduction in losses which is encouraging.
• States that lack political will to reform the distribution
segment have shown weak financial performance.
• Lack of annual tariff revisions, high distribution losses
and freebies given to certain category of consumers
(such as agricultural) can further accentuate the
problem.
• We believe merchant power was a small reason for the
increase in cost of supply. Bulk of the increase was due
to increase in cost of long term power arrangements.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Utilities
A Tale of Three SEBs
Quick Comment: Increasing losses and deteriorating
financial health of State Electricity Boards (SEBs) is a
much talked about topic and was one of the key worries
voiced by investors during our recently concluded
annual power trip. As per a PFC report, SEB losses
aggregated to Rs526bn in F2009 (excluding subsidies),
an increase of Rs205.6bn over F2008. Of the 30 states
surveyed, 14 states were significantly in the red;
however, the important point to note was that three
states accounted for 69% of the incremental losses.
These states were Andhra Pradesh, Tamil Nadu and
Rajasthan (Exhibit 2). On the contrary some states such
as Gujarat showed a reduction in annual losses.
In our view, some of the key reasons that led to weak
performance of these three states were as follows:
1. Mismatch between increase in cost of supply and
tariff revision. Tamil Nadu had not revised tariffs for
seven years while Rajasthan had not revised for five
years. This is in stark contrast to Gujarat where tariff
increases tracked cost inflation in F2007, F2008
and F2009 (Exhibits 3-6).
2. The Agricultural sector was either provided free
power (such as Tamil Nadu) or tariffs had not been
increased for years (Andhra Pradesh agricultural
tariffs were static while in Rajasthan they were down
4-7% between F2007-09). Gujarat on the other
hand increased agricultural tariffs by 32-56%
between F2007-09.
3. Trends in industrial tariffs too were weak with
Andhra Pradesh and Tamil Nadu showing a decline
of 1-2% between F2007-09. Rajasthan industrial
tariffs were up 4% in the same period. In contrast,
Gujarat had revised industrial tariffs up by 8-9%
between F2007-09.
Key points to highlight for the three SEBs are as follows:
Andhra Pradesh
• The gap between cost of supply and tariff increased to
Rs1.25/unit in F2009 from Rs0.48/unit in F2008. While
cost per unit increased at 20% CAGR between
F2007-09, tariffs went up by only 4%, resulting in a
significant mismatch.
• Average agricultural tariffs in the state were as low as
Rs0.08/unit while industrial tariffs were around
Rs3.6-3.7/unit. While agricultural tariffs were largely
static, industrial tariffs declined by 2% between
F2007-09, despite inflationary pressures.
Tamil Nadu
• The gap between cost of supply and tariff increased to
Rs1.38/unit in F2009 from Rs0.77/unit in F2008. While
cost per unit increased at 16% CAGR between
F2007-09, tariffs remained static.
• Tariffs in Tamil Nadu had not been revised for seven
years. Interestingly, the state also ruled out any tariff
revision in F2010 as the industries had not recovered
from the economic recession.
• The state supplies free power to the agricultural sector
which is subsidized by the state government. Industrial
tariffs on the other hand, were down 1% between
F2007-09.
Rajasthan
• The gap between cost of supply and tariff increased to
Rs1.98/unit in F2009 from Rs1.04/unit in F2008. While
cost per unit increased at 28% CAGR between
F2007-09, tariffs increased by only 6%.
• The distribution companies in Rajasthan had not filed
any tariff revision petitions with the state electricity
regulatory commission since 2004.
• Agricultural tariffs were down 4-7% between F2007-09
while trends in industrial tariffs were mixed with two (of
the three) distribution companies showing a 0-2%
decline while the third showing a 14% increase
between F2007-09.
Conclusion: Our key thoughts on the topic of SEB losses
are as follows:
• The deterioration in financial health of SEBs is limited
to a few states and not spread across all the states with
a few states contributing to a large increase in losses.
States such as Gujarat have shown an annual
reduction in losses which is encouraging.
• States that lack political will to reform the distribution
segment have shown weak financial performance.
• Lack of annual tariff revisions, high distribution losses
and freebies given to certain category of consumers
(such as agricultural) can further accentuate the
problem.
• We believe merchant power was a small reason for the
increase in cost of supply. Bulk of the increase was due
to increase in cost of long term power arrangements.
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