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● Since the initiation of power sector reforms, introduced through
the Electricity Act, in 2003, until recently there have been very few
instances of delayed payments from SEBs to power gencos/
transcos. But, over the past year, such instances have increased.
● Important among those are TN delaying payment of Rs12 bn to
wind power producers, expanding receivables’ cycle for Powergrid
and the recent delay in payment of Rs4.8 bn by the Haryana SEB
to NTPC.
● Certainly, the payment security mechanism introduced through the
tripartiate agreement, escrow account and curtailment of power
supply to erring SEBs has worked so far; but we are concerned
about increasing instances of SEBs delaying payments as this
could create a cascading impact on the power sector value chain.
● While some SEBs have finally started to hike power tariffs, we
believe the quantum of these hikes are inadequate to eliminate
SEB losses. We continue to maintain our negative view for the
sector led by the risk from deteriorating SEB finances and the
structural risk emanating from domestic fuel deficits.
Valuation metrics
Company Ticker Rating Price Year P/E (x) P/B (x)
Local Target T T+1 T+2 T+1
Adani Power ADAN.BO N 86 108 03/11 10.7 5.2 2.5
JPVL JAPR.BO N 33 42 03/10 47.1 18.1 2.2
KSK KSKE.BO O 105 166 03/10 29.1 16.6 1.6
Lanco LAIN.BO N 18 26 03/10 11.6 9.5 0.9
NTPC NTPC.BO N 172 186 03/10 15.9 14.4 2.1
NHPC NHPC.NS N 24 27 03/10 15.1 13.6 1.2
Reliance Power RPOL.BO U 79 110 03/10 29.7 35.0 1.3
Tata Power TTPW.BO N 984 1,217 03/10 12.2 10.2 1.6
Note: O = OUTPERFORM, N = NEUTRAL, U = UNDERPERFORM
Source: Company data, Credit Suisse estimates
Instances of delayed payments from SEBs are rising …
Since the initiation of power sector reforms, introduced through the
Electricity Act, in 2003, until recently there have been very few
instances of delayed payments from SEBs to the power generating/
transmitting companies.
However, over the past year, instances of delayed payments by the
SEBs have been increasing as evident from the following instances:
• As per media reports, the Tamil Nadu SEB has delayed payments
of Rs12 bn to several wind power producers in Tamil Nadu during
August 2010 to May 2011. On behalf of the aggrieved wind power
producers, the Indian Wind Power Association has written to the
Prime Minister seeking relief in this matter.
• According to Powergrid’s recent annual report, its receivables cycle
has been extending since the beginning of FY12 (an aberration
from the trend witnessed until FY11). Powergrid used to realise its
receivables within 30 days until FY11, but, recently, discoms of
Delhi, Tamil Nadu, Bihar and some North Eastern states are
availing 60 days grace period for clearing their dues (allowed under
the CERC regulations). More importantly, discoms of Delhi, Daman
& Diu and certain North Eastern states have now delayed payments
beyond the available credit period of 60 days.
• A recent media report suggests that the Haryana SEBs have
delayed payments of Rs4.8 bn to NTPC for the period of August-
September 2011. NTPC has now issued a final notice to the SEBs
asking them to clear its dues by 4 October 2011, failing which it
would recover its payment under the provisions of Tripartiate
Agreement (TPA) or curtail its power supplies.
… although the gencos’ entitlement to curtail power
supply/invoke TPA/escrow mechanisms have worked well
so far
In order to secure payments to the generating companies, SEBs are
currently required to open and maintain revolving letters of credit (LC)
equal to 105% of their average monthly billing over the past 12
months. While SEBs are offered 2% discount on their dues if they
make a payment within 30 days of billing; a delay in payment over 60
days of billing entitles the central power generating companies to
curtail power supply by 5% (10% for payment delayed over 75 days).
Non-payment of dues within 90 days of billing entitles the central
power generating companies (such as NTPC) to recover its dues from
the ‘central plan assistance’ account of the respective state
government with the RBI. Private sector generating companies have
similar arrangements through an escrow mechanism.
Power tariff hikes though welcome are inadequate, need to
accelerate SEB reforms
We are concerned about increasing instances of delayed payments by
the SEBs as delay in payments to the genco/transcos could have a
cascading impact on the entire power sector value chain. While some
SEBs have finally started to raise power tariffs (Figure 1), which is a
welcome step towards power distribution reforms, we believe the
quantum of these hikes are inadequate in comparison to the tariff
hikes required to eliminate SEB losses.
Figure 1: Summary of tariff hikes taken versus required for top six cash
loss-making SEBs
(based on FY09 Cash losses AT&C Tariff hike required to Tariffs hiked
audited numbers) (Rs bn) losses (%) eliminate cash losses recently
Rajasthan (73) 30% 102% 20%
Uttar Pradesh (72) 40% 33% 13%*
Tamil Nadu (66) 15% 41% 9%^
Madhya Pradesh (44) 61% 37% 6%
Maharashtra (26) 31% 3% 3%#
Jammu & Kashmir (14) 69% 142% 38%
*Tariff hiked in FY10, ^hiked in FY11, #hike proposed.
Source: PFC, Media reports, Credit Suisse estimates
While most power distribution sector reforms are currently focussed
on cutting AT&C losses, as highlighted in our detailed report dated
April 2011, SEB risk high for merchant projects, we believe that tariff
hikes are a must for SEB reforms. We estimate SEB losses to reach
about US$20bn by FY15 even after assuming a 5% tariff hike (on all
India basis) and 1% AT&C loss reduction annually over FY09-17. Led
by the risk from deteriorating SEB finances and the structural risk
emanating from domestic fuel deficits, we continue to maintain our
negative view for the India Power utilities sector
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
● Since the initiation of power sector reforms, introduced through
the Electricity Act, in 2003, until recently there have been very few
instances of delayed payments from SEBs to power gencos/
transcos. But, over the past year, such instances have increased.
● Important among those are TN delaying payment of Rs12 bn to
wind power producers, expanding receivables’ cycle for Powergrid
and the recent delay in payment of Rs4.8 bn by the Haryana SEB
to NTPC.
● Certainly, the payment security mechanism introduced through the
tripartiate agreement, escrow account and curtailment of power
supply to erring SEBs has worked so far; but we are concerned
about increasing instances of SEBs delaying payments as this
could create a cascading impact on the power sector value chain.
● While some SEBs have finally started to hike power tariffs, we
believe the quantum of these hikes are inadequate to eliminate
SEB losses. We continue to maintain our negative view for the
sector led by the risk from deteriorating SEB finances and the
structural risk emanating from domestic fuel deficits.
Valuation metrics
Company Ticker Rating Price Year P/E (x) P/B (x)
Local Target T T+1 T+2 T+1
Adani Power ADAN.BO N 86 108 03/11 10.7 5.2 2.5
JPVL JAPR.BO N 33 42 03/10 47.1 18.1 2.2
KSK KSKE.BO O 105 166 03/10 29.1 16.6 1.6
Lanco LAIN.BO N 18 26 03/10 11.6 9.5 0.9
NTPC NTPC.BO N 172 186 03/10 15.9 14.4 2.1
NHPC NHPC.NS N 24 27 03/10 15.1 13.6 1.2
Reliance Power RPOL.BO U 79 110 03/10 29.7 35.0 1.3
Tata Power TTPW.BO N 984 1,217 03/10 12.2 10.2 1.6
Note: O = OUTPERFORM, N = NEUTRAL, U = UNDERPERFORM
Source: Company data, Credit Suisse estimates
Instances of delayed payments from SEBs are rising …
Since the initiation of power sector reforms, introduced through the
Electricity Act, in 2003, until recently there have been very few
instances of delayed payments from SEBs to the power generating/
transmitting companies.
However, over the past year, instances of delayed payments by the
SEBs have been increasing as evident from the following instances:
• As per media reports, the Tamil Nadu SEB has delayed payments
of Rs12 bn to several wind power producers in Tamil Nadu during
August 2010 to May 2011. On behalf of the aggrieved wind power
producers, the Indian Wind Power Association has written to the
Prime Minister seeking relief in this matter.
• According to Powergrid’s recent annual report, its receivables cycle
has been extending since the beginning of FY12 (an aberration
from the trend witnessed until FY11). Powergrid used to realise its
receivables within 30 days until FY11, but, recently, discoms of
Delhi, Tamil Nadu, Bihar and some North Eastern states are
availing 60 days grace period for clearing their dues (allowed under
the CERC regulations). More importantly, discoms of Delhi, Daman
& Diu and certain North Eastern states have now delayed payments
beyond the available credit period of 60 days.
• A recent media report suggests that the Haryana SEBs have
delayed payments of Rs4.8 bn to NTPC for the period of August-
September 2011. NTPC has now issued a final notice to the SEBs
asking them to clear its dues by 4 October 2011, failing which it
would recover its payment under the provisions of Tripartiate
Agreement (TPA) or curtail its power supplies.
… although the gencos’ entitlement to curtail power
supply/invoke TPA/escrow mechanisms have worked well
so far
In order to secure payments to the generating companies, SEBs are
currently required to open and maintain revolving letters of credit (LC)
equal to 105% of their average monthly billing over the past 12
months. While SEBs are offered 2% discount on their dues if they
make a payment within 30 days of billing; a delay in payment over 60
days of billing entitles the central power generating companies to
curtail power supply by 5% (10% for payment delayed over 75 days).
Non-payment of dues within 90 days of billing entitles the central
power generating companies (such as NTPC) to recover its dues from
the ‘central plan assistance’ account of the respective state
government with the RBI. Private sector generating companies have
similar arrangements through an escrow mechanism.
Power tariff hikes though welcome are inadequate, need to
accelerate SEB reforms
We are concerned about increasing instances of delayed payments by
the SEBs as delay in payments to the genco/transcos could have a
cascading impact on the entire power sector value chain. While some
SEBs have finally started to raise power tariffs (Figure 1), which is a
welcome step towards power distribution reforms, we believe the
quantum of these hikes are inadequate in comparison to the tariff
hikes required to eliminate SEB losses.
Figure 1: Summary of tariff hikes taken versus required for top six cash
loss-making SEBs
(based on FY09 Cash losses AT&C Tariff hike required to Tariffs hiked
audited numbers) (Rs bn) losses (%) eliminate cash losses recently
Rajasthan (73) 30% 102% 20%
Uttar Pradesh (72) 40% 33% 13%*
Tamil Nadu (66) 15% 41% 9%^
Madhya Pradesh (44) 61% 37% 6%
Maharashtra (26) 31% 3% 3%#
Jammu & Kashmir (14) 69% 142% 38%
*Tariff hiked in FY10, ^hiked in FY11, #hike proposed.
Source: PFC, Media reports, Credit Suisse estimates
While most power distribution sector reforms are currently focussed
on cutting AT&C losses, as highlighted in our detailed report dated
April 2011, SEB risk high for merchant projects, we believe that tariff
hikes are a must for SEB reforms. We estimate SEB losses to reach
about US$20bn by FY15 even after assuming a 5% tariff hike (on all
India basis) and 1% AT&C loss reduction annually over FY09-17. Led
by the risk from deteriorating SEB finances and the structural risk
emanating from domestic fuel deficits, we continue to maintain our
negative view for the India Power utilities sector
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