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Utilities
India
What plagues SEBs? We recently had a call with a private consultant with the Punjab
State Electricity Board (PSEB) to understand current financial health of state utilities.
Although PSEB continues to be plagued by mounting losses, silver linings in the form of
(1) low to negligible political influence, (2) lower merchant tariffs and increasing Case 1
supply and (3) continuous reduction in T&D losses make us hopeful of improvement in
the financial health of SEBs going forward
Large accumulated losses met by short-term loans
PSEB has been restructured into two entities, i.e. (1) Punjab State Power Corporation Ltd
(Powercom), to manage generation and distribution, and (2) Punjab State Transmission
Corporation Ltd (Transco), to look after transmission functions. Powercom losses are mounting
and accumulated losses had reached Rs97 bn (post accounting for cash subsidy from the state
government) at the end of FY2010 from a mere Rs5 bn at end of FY2004. PSEB estimates FY2010
losses at ~Rs15 bn (post subsidy) on revenues of Rs128 bn. These losses are currently being funded
by short-term loans of Rs60 bn against total debt of Rs190 bn.
High employee cost and costly power purchase—drag on financials
As per news reports, Powercom has more than 65,000 employees and has an estimated employee
cost of ~Rs28 bn annually. The state regulator has not allowed full pass-through of employee cost
in tariff fixation despite Powercom having little control over this cost (salaries have risen based on
government fiat-like 6th pay commission). The regulator in the early stages did not allow for WPIlinked inflation to wage cost in tariff calculation and even though that has changed now, the
approved wage cost is still not sufficient to cover full extent of wage cost hikes and increased
terminal benefits. The regulator has also in the past disallowed the cost of high-price merchant
power procured by the SEB from the open market, leading to increased losses.
Silver linings – low political influence and reduction in T&D losses
While the financials of PSEB are in an extremely bad shape, we highlight few positive takeaways
from the call which suggest that situation may be brought under control and is unlikely to go
completely out of hand:
` Level of political influence seems low—cash subsidy, merchant power and tariffs all controlled
by regulator: Based on the discussion, we believe that the government provided cash subsidy of
Rs33 bn in FY2010 and once the government commits to provide cash subsidy, only then the
power is supplied to farmers.
` T&D losses trending down, remote meters and HVDS would help—aggregate T&D losses which
were 27.5% in FY2001-02 have trended down meaningfully and now stand at 20.12% during
FY2010. The regulator has mandated 1.25% reduction each year and a slower progress versus
this milestone leads to accounting losses in the books of this company. Powercom is moving to
High Voltage Distribution system (11,000 V versus 440 V typically) particularly for agriculture to
reduce technical losses.
` Lower merchant tariffs and incremental Case 1 generation would limit power purchase costs—
scale-up of power from private sector plants (Talwandi Sabo – Sterlite 1,980 MW; Goindwal
Sahib – 540 WM, Rajpura – 2,100 MW) coming under Case 1 bids would help reduce outgo on
power purchases.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Utilities
India
What plagues SEBs? We recently had a call with a private consultant with the Punjab
State Electricity Board (PSEB) to understand current financial health of state utilities.
Although PSEB continues to be plagued by mounting losses, silver linings in the form of
(1) low to negligible political influence, (2) lower merchant tariffs and increasing Case 1
supply and (3) continuous reduction in T&D losses make us hopeful of improvement in
the financial health of SEBs going forward
Large accumulated losses met by short-term loans
PSEB has been restructured into two entities, i.e. (1) Punjab State Power Corporation Ltd
(Powercom), to manage generation and distribution, and (2) Punjab State Transmission
Corporation Ltd (Transco), to look after transmission functions. Powercom losses are mounting
and accumulated losses had reached Rs97 bn (post accounting for cash subsidy from the state
government) at the end of FY2010 from a mere Rs5 bn at end of FY2004. PSEB estimates FY2010
losses at ~Rs15 bn (post subsidy) on revenues of Rs128 bn. These losses are currently being funded
by short-term loans of Rs60 bn against total debt of Rs190 bn.
High employee cost and costly power purchase—drag on financials
As per news reports, Powercom has more than 65,000 employees and has an estimated employee
cost of ~Rs28 bn annually. The state regulator has not allowed full pass-through of employee cost
in tariff fixation despite Powercom having little control over this cost (salaries have risen based on
government fiat-like 6th pay commission). The regulator in the early stages did not allow for WPIlinked inflation to wage cost in tariff calculation and even though that has changed now, the
approved wage cost is still not sufficient to cover full extent of wage cost hikes and increased
terminal benefits. The regulator has also in the past disallowed the cost of high-price merchant
power procured by the SEB from the open market, leading to increased losses.
Silver linings – low political influence and reduction in T&D losses
While the financials of PSEB are in an extremely bad shape, we highlight few positive takeaways
from the call which suggest that situation may be brought under control and is unlikely to go
completely out of hand:
` Level of political influence seems low—cash subsidy, merchant power and tariffs all controlled
by regulator: Based on the discussion, we believe that the government provided cash subsidy of
Rs33 bn in FY2010 and once the government commits to provide cash subsidy, only then the
power is supplied to farmers.
` T&D losses trending down, remote meters and HVDS would help—aggregate T&D losses which
were 27.5% in FY2001-02 have trended down meaningfully and now stand at 20.12% during
FY2010. The regulator has mandated 1.25% reduction each year and a slower progress versus
this milestone leads to accounting losses in the books of this company. Powercom is moving to
High Voltage Distribution system (11,000 V versus 440 V typically) particularly for agriculture to
reduce technical losses.
` Lower merchant tariffs and incremental Case 1 generation would limit power purchase costs—
scale-up of power from private sector plants (Talwandi Sabo – Sterlite 1,980 MW; Goindwal
Sahib – 540 WM, Rajpura – 2,100 MW) coming under Case 1 bids would help reduce outgo on
power purchases.
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