Utilities: State utilities - losses increase, though recent tariff hikes are encouraging::Kotak Sec,

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Utilities
India
State utilities—losses increase, though recent tariff hikes are encouraging. State
utilities reported an 18% yoy increase in aggregate losses (without subsidy) at Rs635 bn
for FY2010, although on a subsidy booked basis the losses were a more modest Rs295
bn. The absence of tariff increases and non-payment of subsidies remain the key cause
of concern in an environment of rising cost of supply. However, recent tariff hikes by
several states and lower cost of power purchased from the short-term market could
help curtail losses. We continue to align with integrated utilities preferably with
resource ownership—NHPC, CESC and Tata Power remain our preferred stocks.


Aggregate SEB losses without subsidy jumped 18% yoy in FY2010
As per the report on financial performance of State Electricity Boards (SEBs) released by Power
Finance Corporation (PFC), aggregate book losses of all state utilities increased from Rs537 bn in
FY2009 to Rs635 bn in FY2010 (without accounting for subsidies). However, the losses on a
subsidy booked basis were Rs295 bn and on a subsidy received basis Rs384 bn in FY2010. Bulk of
the losses (62%) continue to be contributed by the top-4 loss making states namely Rajasthan,
Tamil Nadu, Uttar Pradesh and Andhra Pradesh in the same order (see Exhibit 3). Average AT&C
losses improved marginally by 60 bps to 27.2% in FY2010. More on key highlights of the report in
a subsequent section.
Per unit revenue gap widens, albeit at a receding rate
Average revenue gap (difference between average cost of supply and average realization)
increased to 86p/kwh (9% yoy), although on a subsidy booked basis the revenue gap is a more
manageable Rs0.38/kwh (11% of tariffs). We note that FY2009 saw a sharp jump in power
purchase and employee cost without a corresponding increase in tariffs, leading to a sharp 46%
yoy jump in the revenue gap which has been more contained in FY2010. In our view, the lower
cost of power purchased from the short-term market, coupled with tariff hikes announced in
various states would help absorb the impact of rising coal prices and keep a check on the
ballooning revenue gap.
Wheels have been set in motion but a lot is yet to be done
We are encouraged by the tariff hikes being announced / implemented in various states as well as
urgency shown by policy makers to address the problem of deteriorating financials of SEBs. We
note that most of these states have not had any tariff revisions for the past several years and
although the tariff hikes would plug to an extent the current revenue gap, the absence of (1)
frequent tariffs revisions, (2) automatic pass through of fuel and power purchase cost and (3)
receipt of subsidies in a timely manner continue to constrain the financials of state utilities.
Align with integrated utilities or resource owners
We continue to maintain our conservative stance to align with either integrated utilities or
resource owners. In a scenario of deteriorating demand-supply imbalance of coal and indifferent
financial health of SEBs, we recommend aligning with utilities which are integrated with enddistribution
business (Tata Power, CESC), or are not dependent on coal from Coal India (NHPC)
thereby minimizing exposure to state-owned distribution companies and/or linkage coal from Coal
India.


Key highlights of the report
We discuss below key financial and operational highlights of the report on SEB performance
for FY2010.
�� Capacity, generation and sales. Total installed capacity increased to 73,198 MW in
FY2010 from 71,103 MW in FY2009 with a corresponding increase in generation from
344 bn kwh to 346 bn kwh. Total sale of power increased 9% yoy with a corresponding
12% increase in power purchased (see Exhibit 4).
�� Subsidy booked and received. Total subsidy booked increased to Rs340 bn (54% of
total losses) in FY2010 as against Rs289 bn (54% of total losses) in FY2009. However,
subsidy received increased to Rs191 bn (56% of subsidy booked) from Rs157 bn in
FY2009 (see Exhibit 5).
�� Breakup of costs. A bulk of the cost is driven by power purchase cost which accounts for
61% of total costs) followed by generation cost (14%), employee cost (9%) and interest
cost (7%). We note that the cost breakup may vary across utilities but inflation in power
purchase cost and generation cost without a corresponding tariff hike has been the key
contributor to the mounting losses (see Exhibit 6).
�� Top-4 loss making states. Rajasthan, Tamil Nadu, Uttar Pradesh and Andhra Pradesh
continue to be the top-4 loss making states and contributed 62% of total losses in
FY2010.
�� Aggregate Technical and Commercial losses (AT&C losses). AT&C losses improved
marginally by 59 bps to 27.15%. The southern region continues to have the lowest AT&C
losses of 19.5%.
�� Debt. Total debt as of March 2010 increased to Rs3,109 bn from Rs2,450 bn as of March
2009, bulk of which have been borrowed from banks and financial institutions. We note
that a large portion of this debt is borrowed for financing the operational losses of these
utilities.
�� Receivables. Total receivables increased from Rs555 bn as of March 2009 to Rs649 bn as
of March 2010. However, receivables as days of sales remained constant at 109 days.