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Indian banks
Power sector- lenders slightly more
cautious but still comfortable
Event
We talked to a few lenders on the recent issues pertaining to power sector
lending in India. Lending to power is likely to continue as a key growth driver
— both for banks and non-banks. Recent headwinds to the sector are forcing
lenders to be more cautious at the margins. However, they are reasonably
confident of the asset quality and also enjoying better pricing.
Impact
Lenders turning cautious on margins. The key concerns remain
inadequate fuel supply and environmental clearances.
Starting to look for a fuel supply agreement versus just coal linkage.
Having an FSA is better, as it comes with fines for non supply of fuel.
Toning down their PLF expectations. A conservative 80% is the plant
load factor that all of them take into account. However, they are also
stress testing PLF, going to ~70% in their estimates.
Who is the promoter — that’s a key question. The prime focus is on the
promoter: his track record in execution, his balance sheet strength, and
even his political links, which can get the needed clearances.
Merchant power prices still comfortable for banks, despite sharp decline
from peak. Twin drivers of decline have been strong monsoon and SEBs not
prepared to pay high prices. However, lenders we spoke to are comfortable at
current prices, as they build in Rs3-3.5 per unit for merchant in their estimates
(vs ~Rs4 current rates). They also rely on the PPA revenues to cover their
repayments, with merchant revenues being ‘icing on the cake’.
State electricity board losses, a tricky issue. Five of the states, as per a
PFC report on SEB’s financial health, have contributed a large chunk of the
losses in FY09. However, even the biggest loss-making entities have been
regular in making their payments. In the long term, any material change in the
SEB finances is dependant on substantial tariff revision and reduction in
AT&C losses. This, in turn, is dependant on political exigencies.
Loan pricing has seen an increase. Interest rates on loans have increased
from 11–11.5% from about six months back to 12-13% now. Growth in the
medium term is likely to moderate from the current 35-40% as the slower
project execution has its impact. The impact is, however, more likely to be
spread over time rather than sharp and sudden, as the loans typically
themselves take approximately four years to be disbursed.
Outlook
Our view- A combination of execution delays and a more cautious approach
from lenders is likely to moderate growth for the sector as a whole to ~22-
25%YoY in the medium term. Regulatory forbearance remains a big comfort
factor for the sector. Pricing increases will help to offset some of the squeeze
of higher cost of funds. We have an Outperform rating on IDFC, PFC and
REC which are three NBFCs focussed on the power sector.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Indian banks
Power sector- lenders slightly more
cautious but still comfortable
Event
We talked to a few lenders on the recent issues pertaining to power sector
lending in India. Lending to power is likely to continue as a key growth driver
— both for banks and non-banks. Recent headwinds to the sector are forcing
lenders to be more cautious at the margins. However, they are reasonably
confident of the asset quality and also enjoying better pricing.
Impact
Lenders turning cautious on margins. The key concerns remain
inadequate fuel supply and environmental clearances.
Starting to look for a fuel supply agreement versus just coal linkage.
Having an FSA is better, as it comes with fines for non supply of fuel.
Toning down their PLF expectations. A conservative 80% is the plant
load factor that all of them take into account. However, they are also
stress testing PLF, going to ~70% in their estimates.
Who is the promoter — that’s a key question. The prime focus is on the
promoter: his track record in execution, his balance sheet strength, and
even his political links, which can get the needed clearances.
Merchant power prices still comfortable for banks, despite sharp decline
from peak. Twin drivers of decline have been strong monsoon and SEBs not
prepared to pay high prices. However, lenders we spoke to are comfortable at
current prices, as they build in Rs3-3.5 per unit for merchant in their estimates
(vs ~Rs4 current rates). They also rely on the PPA revenues to cover their
repayments, with merchant revenues being ‘icing on the cake’.
State electricity board losses, a tricky issue. Five of the states, as per a
PFC report on SEB’s financial health, have contributed a large chunk of the
losses in FY09. However, even the biggest loss-making entities have been
regular in making their payments. In the long term, any material change in the
SEB finances is dependant on substantial tariff revision and reduction in
AT&C losses. This, in turn, is dependant on political exigencies.
Loan pricing has seen an increase. Interest rates on loans have increased
from 11–11.5% from about six months back to 12-13% now. Growth in the
medium term is likely to moderate from the current 35-40% as the slower
project execution has its impact. The impact is, however, more likely to be
spread over time rather than sharp and sudden, as the loans typically
themselves take approximately four years to be disbursed.
Outlook
Our view- A combination of execution delays and a more cautious approach
from lenders is likely to moderate growth for the sector as a whole to ~22-
25%YoY in the medium term. Regulatory forbearance remains a big comfort
factor for the sector. Pricing increases will help to offset some of the squeeze
of higher cost of funds. We have an Outperform rating on IDFC, PFC and
REC which are three NBFCs focussed on the power sector.
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