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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Not all bad news from SEBs
Rising SEB losses has re-emerged as a key concern for stocks
associated with the power sector. While there is indeed a need to
accelerate reforms to address this issue, our analysis of the state of
SEB finances and developments in the power sector suggests that the
picture on SEB losses is skewed by a few states, the 13th Finance
Commission's estimate of Rs686bn of aggregate losses is only a worst
case estimate and tariff actions by SEBs, along with falling merchant
power rates, will help prevent any default by SEBs. We remain
positive on stocks like Tata Power, NTPC, JSPL and Adani Power, on a
framework that assesses state-level exposure, tariff protection and
fuel availability - which we see as the key issue for the sector.
Some signs of rationalization of tariffs
q Numbers of state regulator have approved tariff hikes for the end users in their
most recent tariff orders.
q With the cost of power procurement going up every year this was an inevitable
event and will reduce some pressure for the respective distribution companies.
q Some of the states have fixed the recent tariff as per the National Tariff Policy
guidelines (for e.g. Madhya Pradesh) which states that the tariff for all consumer
categories should be within +/- 20% of the cost of supply. However in most states
the agricultural tariff continues to be much lower and industrial consumers are
made to pay for this additional burden.
Lower merchant tariffs and higher subsidy would also help
q The short term tariffs have corrected sharply and we expect them to fall further to
Rs3.5/kWh by next year. This will reduce the cost of procurement of state
distribution companies going ahead.
q We expect the state subsidies given to the distribution companies to increase (and
have already seen that in number of tariff orders such as Andhra Pradesh, Uttar
Pradesh) as states won’t be able to pass on all their cost increases as tariffs.
Funding of revenue gap of SEBs
q Many states have carried forward losses due to no tariff revisions/inadequate
revisions over long periods of time and also due to getting lower than expected
subsidy from their respective state governments.
q The revenue gap between the tariff and the cost of supply is bridged to an extent
by state subsidies. The state distribution companies borrow more if there is need
for cash for working capital requirements.
q The bonds issued by the state distribution utilities are guaranteed by the respective
state governments (both principal and interest) and therefore even SEBs with
negative net worth are able to raise money.
q We have also seen a trend of converting past dues into a regulatory asset in some
tariff orders (Tamil Nadu, Jharkhand, Delhi) and the states can actually borrow
against it. While some of the states have given a road map of how they are going
to recover the regulatory asset (Tariff policy recommends writing off the regulatory
asset over a period of three years) some states like Tamil Nadu have no
plans/views about this.
Low probability of SEB default
q We see low probability of SEB default on the power purchase agreements (PPAs)
they have signed. All private companies and central utilities have so far been
receiving cash on time from various state distribution companies.
q All central power utilities (like NTPC, NHPC, Powegrid, and NPCIL) are protected by
a Tri-partite agreement (valid till 2016).
q Most of the private sector PPAs have a following structure 1) Letter of Credit (LC)
for one month of invoice 2) default escrow where the receivables from the end user
are collected ) 3) an option to sell power to a third party.
q State like Tamil Nadu which has the worst financial condition in the country has
recently issued bonds to finance its working capital which were fully guaranteed by
the state government.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Not all bad news from SEBs
Rising SEB losses has re-emerged as a key concern for stocks
associated with the power sector. While there is indeed a need to
accelerate reforms to address this issue, our analysis of the state of
SEB finances and developments in the power sector suggests that the
picture on SEB losses is skewed by a few states, the 13th Finance
Commission's estimate of Rs686bn of aggregate losses is only a worst
case estimate and tariff actions by SEBs, along with falling merchant
power rates, will help prevent any default by SEBs. We remain
positive on stocks like Tata Power, NTPC, JSPL and Adani Power, on a
framework that assesses state-level exposure, tariff protection and
fuel availability - which we see as the key issue for the sector.
Some signs of rationalization of tariffs
q Numbers of state regulator have approved tariff hikes for the end users in their
most recent tariff orders.
q With the cost of power procurement going up every year this was an inevitable
event and will reduce some pressure for the respective distribution companies.
q Some of the states have fixed the recent tariff as per the National Tariff Policy
guidelines (for e.g. Madhya Pradesh) which states that the tariff for all consumer
categories should be within +/- 20% of the cost of supply. However in most states
the agricultural tariff continues to be much lower and industrial consumers are
made to pay for this additional burden.
Lower merchant tariffs and higher subsidy would also help
q The short term tariffs have corrected sharply and we expect them to fall further to
Rs3.5/kWh by next year. This will reduce the cost of procurement of state
distribution companies going ahead.
q We expect the state subsidies given to the distribution companies to increase (and
have already seen that in number of tariff orders such as Andhra Pradesh, Uttar
Pradesh) as states won’t be able to pass on all their cost increases as tariffs.
Funding of revenue gap of SEBs
q Many states have carried forward losses due to no tariff revisions/inadequate
revisions over long periods of time and also due to getting lower than expected
subsidy from their respective state governments.
q The revenue gap between the tariff and the cost of supply is bridged to an extent
by state subsidies. The state distribution companies borrow more if there is need
for cash for working capital requirements.
q The bonds issued by the state distribution utilities are guaranteed by the respective
state governments (both principal and interest) and therefore even SEBs with
negative net worth are able to raise money.
q We have also seen a trend of converting past dues into a regulatory asset in some
tariff orders (Tamil Nadu, Jharkhand, Delhi) and the states can actually borrow
against it. While some of the states have given a road map of how they are going
to recover the regulatory asset (Tariff policy recommends writing off the regulatory
asset over a period of three years) some states like Tamil Nadu have no
plans/views about this.
Low probability of SEB default
q We see low probability of SEB default on the power purchase agreements (PPAs)
they have signed. All private companies and central utilities have so far been
receiving cash on time from various state distribution companies.
q All central power utilities (like NTPC, NHPC, Powegrid, and NPCIL) are protected by
a Tri-partite agreement (valid till 2016).
q Most of the private sector PPAs have a following structure 1) Letter of Credit (LC)
for one month of invoice 2) default escrow where the receivables from the end user
are collected ) 3) an option to sell power to a third party.
q State like Tamil Nadu which has the worst financial condition in the country has
recently issued bonds to finance its working capital which were fully guaranteed by
the state government.
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