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India: Utilities
Equity Research
SEB Health-check 4: RJ: Likely shift from capex to funding deficits
Rajasthan: 7% of consumption; ‘focus’ sector of RJ government
Rajasthan (RJ) discoms consume about 7% of power generated in India
with T&D losses of about 30% (vs India average of 26%). The government
allocated 42% (about US$3 bn) of its FY12 budgeted outlay for the power
sector, primarily for capex in the generation and transmission segment.
Accumulated revenue gap of about US$10 bn, growing at 15%-20%
Based on discom filings, we estimate the accumulated revenue gap funded
primarily through debt is about US$10 bn (10% of GSDP or 80% of FY12
state revenue receipts) and is likely to grow at 15%-20% p.a., despite a 17%-
22% tariff hike proposed for FY12. The key reasons, in our view, are: 1) nonrevision of tariffs over the last six years; 2) 35% CAGR (FY08-12E) in supply
to agriculture; and 3) ‘cost of carry’ of the accumulated revenue gap.
72% of agri-consumption is metered; structural advantage to
implement tariff hikes
Discoms expect to sell about 46% of their FY12 volumes to the agriculture
segment, whose realizations just cover about 21% of their FY12 average
cost of power supply. While tariff hikes for agriculture are more at the
discretion of the government, we believe metering of 72% of consumption
(one of the highest in India) ensures that tariff hikes, when necessary, can
be easily implemented without any major risk of commercial losses.
What options does Rajasthan have to reduce the revenue gap?
Options available (one or a combination), in our view, are: 1) diversion of
FY12 budgetary allocation of about US$1.5 on capex for generation and
transmission to fund working capital of discoms; 2) tariff hikes of about
30%, which will cover all cash expenses other than interest; 3) additional
budgetary allocation to fund interest burden of the accumulated revenue
gap (impact will be about 1% of GSDP); and 4) restricted supply to the
agricultural segment, which will improve realizations by 2%.
Low risk to utilities assuming continuation of bank credit
We believe the impact of weakening finances on utilities will be limited, in the
absence of funding constraints for discoms. Moreover, we expect them to
benefit from higher sales, as revenue now almost covers cost of power
purchases and higher sales will help recover fixed costs. NTPC, JSW Energy,
& NHPC are exposed to RJ discoms. We maintain Neutral on these stocks.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India: Utilities
Equity Research
SEB Health-check 4: RJ: Likely shift from capex to funding deficits
Rajasthan: 7% of consumption; ‘focus’ sector of RJ government
Rajasthan (RJ) discoms consume about 7% of power generated in India
with T&D losses of about 30% (vs India average of 26%). The government
allocated 42% (about US$3 bn) of its FY12 budgeted outlay for the power
sector, primarily for capex in the generation and transmission segment.
Accumulated revenue gap of about US$10 bn, growing at 15%-20%
Based on discom filings, we estimate the accumulated revenue gap funded
primarily through debt is about US$10 bn (10% of GSDP or 80% of FY12
state revenue receipts) and is likely to grow at 15%-20% p.a., despite a 17%-
22% tariff hike proposed for FY12. The key reasons, in our view, are: 1) nonrevision of tariffs over the last six years; 2) 35% CAGR (FY08-12E) in supply
to agriculture; and 3) ‘cost of carry’ of the accumulated revenue gap.
72% of agri-consumption is metered; structural advantage to
implement tariff hikes
Discoms expect to sell about 46% of their FY12 volumes to the agriculture
segment, whose realizations just cover about 21% of their FY12 average
cost of power supply. While tariff hikes for agriculture are more at the
discretion of the government, we believe metering of 72% of consumption
(one of the highest in India) ensures that tariff hikes, when necessary, can
be easily implemented without any major risk of commercial losses.
What options does Rajasthan have to reduce the revenue gap?
Options available (one or a combination), in our view, are: 1) diversion of
FY12 budgetary allocation of about US$1.5 on capex for generation and
transmission to fund working capital of discoms; 2) tariff hikes of about
30%, which will cover all cash expenses other than interest; 3) additional
budgetary allocation to fund interest burden of the accumulated revenue
gap (impact will be about 1% of GSDP); and 4) restricted supply to the
agricultural segment, which will improve realizations by 2%.
Low risk to utilities assuming continuation of bank credit
We believe the impact of weakening finances on utilities will be limited, in the
absence of funding constraints for discoms. Moreover, we expect them to
benefit from higher sales, as revenue now almost covers cost of power
purchases and higher sales will help recover fixed costs. NTPC, JSW Energy,
& NHPC are exposed to RJ discoms. We maintain Neutral on these stocks.
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