Power Finance Corp – Tipping point:: RBS

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In a recent development, the state ministers adopted resolution to bring down power distribution
losses. The proposed developments will likely put pressure on state governments to: (a) increase
tariffs and (b) reduce T&D losses. At 1.3x FY12F book value, we find PFC attractive. Re-iterate
Buy.


􀀟 We believe, the two weakest links in the Indian power sector are: (a) Weak financial health of
power distribution bodies, and (b) Coal shortage. To address the former issue, the Indian
Ministry of Power ( MoP) organised a State Power Ministers' Conference on "Distribution
Sector Reforms" in New Delhi yesterday.
􀀟 The conference focussed and agreed to implement measures on issues which are well known
like (i) tariff filing and tariff revision on time, (ii) preparation of state financials on time, (c)
automatic pass through in tariff for any increase in fuel cost, (iv) advance payment of subsidy
by state governments and payment of all outstanding subsidy as soon as possible, (v)
reduction in T&D losses to 15% (timeline to be different for different states), (vi) appointment
of distribution franchises in urban areas, and (vii) state governments to consider converting
loans due from them to the distribution utilities as state government equity to ensure capital
infusion and improvement in net worth of utility.
We believe this is a key positive for the sector as:
􀀟 The resolution highlighted state's responsibility for implementing the reforms. According to the
Indian power minister, power is a concurrent subject, while the Centre is always ready to help
the States, it is their responsibility to ensure implementation of the reforms. Hence it is
unlikely that Centre will chose to bail-out the state utilities, which in our view is a positive.
􀀟 States to increase tariffs to reflect the power purchase costs. States accorded to ensure that
the difference between average revenue realization (ARR) should exceed the average cost of
supply (ACS), so that the internal surpluses can be used for network expansion and
maintenance. Also, they agreed to the timely submission of annual tariff revision petition,
keeping in view the increase in the power purchase costs (accounting for 70-80% of the cost
of supply). Further, the state governments will consider converting the loans due from the
distribution utilities into state government equity to ensure capital infusion and boost the
networth.