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Power Financing NBFCs
Resolution not a game changer
State power ministers, in a conference on “Distribution Sector Reforms”, have
unanimously agreed upon a set of measures to bring down distribution losses. While
the adopted resolution, if implemented, would help address losses, we note that these
measures are not new and already part of various legislations, including the
Electricity Act, 2003. Execution is the key risk in our view, given that the
responsibility of implementation lies with various state governments. We would like
to see some concrete steps towards the execution of these measures before upgrading
our recommendation on PFC/REC. We continue to prefer select PSU banks over
PFC/REC and like PFC between the two power finance entities.
v Central government to act as a coordinator only: In the conference, Union
Minister of Power Mr. Sushil Kumar Shinde highlighted that power is a concurrent
subject and reform implementation is the responsibility of states.
v Subsidy payment already part of the Electricity Act, 2003: State power ministers
have agreed to clear all outstanding subsidies to the utilities and to ensure advance
payment of subsidy as per the Electricity Act, 2003, in future. While this measure, if
implemented, could sharply bring down cash losses of SEBs (Fig 5, 6), higher
subsidy payment would strain state government finances. We note that the proportion
of subsidy received (to total subsidy booked) by SEBs has declined from 94% in
FY07 to 62% in FY09 (Source: PFC’s report on SEBs) as some state governments
are not releasing their share of the subsidy.
v Loans by state government to be converted into equity: State governments would
consider converting loans due from state governments to equity capital to improve
the net worth of utilities. However, loans by state government constitute only a small
portion of total SEB loans.
v Execution is the key: While the adopted resolutions are a step in the right direction,
we believe execution is the key. We note that SEB losses have risen (despite
regulations already in place for subsidy and tariff hikes) due to the reluctance of
some state governments in increasing power tariffs.
v Continue to prefer banks over power financing NBFCs: Power financing NBFCs
are up sharply today on the back of adopted resolutions by state power ministers.
However, we maintain our negative view on the sector and would wait for evidence
on implementation of these resolutions before changing our underweight view on
PFC/REC.
We continue to prefer select PSU banks which are trading at similar valuations
despite their more diversified portfolios, similar (or better) ROEs and healthy
coverage ratios. Between PFC and REC, we continue to like PFC due to its relatively
lower leverage, higher exposure to the generation segment and a valuation discount
to REC (PFC is trading at 1.3x FY12 BV as against 1.5x FY12 for REC).
Resolutions adopted at the conference
As per the Press Information Bureau (PIB), Government of India, the following resolutions
were adopted unanimously by the State Power Ministers’ Conference to bring down
distribution losses:
• State governments would not only clear all outstanding subsidies to the utilities, but
ensure advance payment of subsidy as per Section 65 of the Electricity Act, 2003, in
future.
• State governments would consider converting loans due from state governments to
distribution utilities as state government equity to ensure capital infusion and
improvement in net worth of utilities.
• State governments would ensure payment of all outstanding dues from their various
departments and institutions to the distribution utilities or release payments from the
state budget directly.
• States would ensure that distribution utilities file their Annual Tariff Revision Petition
every year, by December–January of the preceding financial year to the State Regulators
as stipulated by the National Tariff Policy.
• The Annual Tariff Revision Petition would be filed before the SERC, keeping in view the
increase of the power purchase cost (~70–80% of the cost of supply). Moreover, states
will ensure that the difference between ARR and ACS is not only bridged but is
positive to generate internal surpluses which can be used for network expansion and
maintenance.
• State governments would ensure automatic pass-through in tariff for any increase in
fuel costs by incorporating the same in the regulations, as provided in Section 62(4) of
the Electricity Act, 2003. (State governments can issue directions to SERCs under Section
108 of the Electricity Act, 2003).
• The eligibility criteria for inclusion of towns under R-APDRP assistance with a
population of 30000 (10000 for special category states) should be reduced to 15000 (5000
for special category states). All district headquarter towns in special category states
should also be covered under R-APDRP, irrespective of their population.
• State governments would ensure that the accounts of utilities are audited up to the year
2009-10 and also that the accounts of a financial year are audited by September of the
next financial year, henceforth. Computerisation of accounts would be undertaken on
priority, if not done already.
The state governments would take effective steps to reduce AT&C losses to less than
15% by administrative measures, curbing pilferage of electricity and by setting up special
police stations and special courts to deal exclusively with power theft-related cases, if not
done already.
• States would immediately initiate steps to appoint distribution franchises in urban
areas through competitive bidding.
• States would immediately invite bids for meeting the uncovered generation capacity
gap vis-à-vis the requirement in their states by end of the 12
th
plan. The process will be
completed by March ’12.
• States would create a unit for integrated planning of generation, transmission and
distribution to meet the future requirement of their states
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