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SEB Health-check 3: AP: Populist tariffs, but better state finances
AP: Efficient; supply to agriculture segment highest in India
Andhra Pradesh (AP) consumes about 10% of the power generated in India, and
its distribution utilities are efficient with AT&C losses of 13%-17% vs. the Indian
average of 26%. AP sells 25%-30% of its own consumption to agriculture, which
is un-metered and contributes just 1% of total revenue.
90% consumption subsidized till FY10; higher sales, higher subsidy
We believe (1) volume growth of 10% CAGR for AP discoms over FY08-FY10
(driven by industrial and domestic segments); and (2) continued supply to the
agriculture segment (purchased mainly from the merchant market) led to a 4X
increase in subsidy over FY07-FY10. However, with recent tariff hikes, subsidized
consumption fell to 63% from 90% in FY10 and the discoms expect the revenue
gap to decline to Rs0.88/kwh in FY12 vs. Rs1.60/kwh in FY09.
Cost disallowance + subsidy shortfall = US$2.6bn due to discoms
Our analysis of tariff petitions show that: (1) power purchases, which were
disallowed from FY07-10 totaled Rs53.3bn; and (2) a subsidy shortfall for FY07-
FY11, totaling US$2.6bn (1.8% of AP GSDP) is due from the AP government. We
believe cost of carry of this shortfall will continue to impact discoms.
12%-15% tariff hike sufficient, but status quo may continue
While a 35% tariff hike is required for discoms to become self sufficient, we
estimate, realistically, a 12%-15% tariff hike is sufficient to bring subsidy levels to
Rs45bn – as per the FY12 AP budget. However, our interaction with AP discoms
and the regulator indicate that any meaningful tariff hike is unlikely until the
ongoing Telangana issue is resolved. Further, the discoms expect stiff resistance
from industrial and domestic consumers to cross-subsidize agri-consumers.
Better state finances can absorb populist tariffs, in our view
In the absence of tariff hikes, we estimate the incremental burden on AP to be
about 0.36% of GSDP/year, and with AP having a revenue surplus of 0.5%-1% of
GSDP, we believe AP is better positioned to absorb the cost of populist tariffs.
No apparent risks to utilities; Lanco, NTPC are exposed to AP
Unlike UP, with AP having no structural issues and most of the gap being funded
by a relatively strong exchequer, the utilities exposed to AP have low default risk
and low receivables risk. We reiterate our CL-Buy rating on Lanco (Rs36.6) and
our Neutral rating on NTPC (Rs178.3).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
SEB Health-check 3: AP: Populist tariffs, but better state finances
AP: Efficient; supply to agriculture segment highest in India
Andhra Pradesh (AP) consumes about 10% of the power generated in India, and
its distribution utilities are efficient with AT&C losses of 13%-17% vs. the Indian
average of 26%. AP sells 25%-30% of its own consumption to agriculture, which
is un-metered and contributes just 1% of total revenue.
90% consumption subsidized till FY10; higher sales, higher subsidy
We believe (1) volume growth of 10% CAGR for AP discoms over FY08-FY10
(driven by industrial and domestic segments); and (2) continued supply to the
agriculture segment (purchased mainly from the merchant market) led to a 4X
increase in subsidy over FY07-FY10. However, with recent tariff hikes, subsidized
consumption fell to 63% from 90% in FY10 and the discoms expect the revenue
gap to decline to Rs0.88/kwh in FY12 vs. Rs1.60/kwh in FY09.
Cost disallowance + subsidy shortfall = US$2.6bn due to discoms
Our analysis of tariff petitions show that: (1) power purchases, which were
disallowed from FY07-10 totaled Rs53.3bn; and (2) a subsidy shortfall for FY07-
FY11, totaling US$2.6bn (1.8% of AP GSDP) is due from the AP government. We
believe cost of carry of this shortfall will continue to impact discoms.
12%-15% tariff hike sufficient, but status quo may continue
While a 35% tariff hike is required for discoms to become self sufficient, we
estimate, realistically, a 12%-15% tariff hike is sufficient to bring subsidy levels to
Rs45bn – as per the FY12 AP budget. However, our interaction with AP discoms
and the regulator indicate that any meaningful tariff hike is unlikely until the
ongoing Telangana issue is resolved. Further, the discoms expect stiff resistance
from industrial and domestic consumers to cross-subsidize agri-consumers.
Better state finances can absorb populist tariffs, in our view
In the absence of tariff hikes, we estimate the incremental burden on AP to be
about 0.36% of GSDP/year, and with AP having a revenue surplus of 0.5%-1% of
GSDP, we believe AP is better positioned to absorb the cost of populist tariffs.
No apparent risks to utilities; Lanco, NTPC are exposed to AP
Unlike UP, with AP having no structural issues and most of the gap being funded
by a relatively strong exchequer, the utilities exposed to AP have low default risk
and low receivables risk. We reiterate our CL-Buy rating on Lanco (Rs36.6) and
our Neutral rating on NTPC (Rs178.3).
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