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India power lending
No easy solutions
Event
We went to a discussion on credit quality for power sector lenders organised
by rating agency CRISIL yesterday. The panel members were from CRISIL,
power lenders and corporates. The consensus was on the need for urgent
sector reforms to avert systemic shocks with the hope that the very urgent
nature of problems shocks politicians into action.
Impact
How bad can it really get for the power lenders? The answer: really bad if
no steps are taken, bad if reforms are undertaken now. CRISIL estimates a
tariff increase of 47% is needed for state distribution companies to break
even, given the current losses. This we believe is a large number and it is
unlikely that state governments will have the political will to implement.
Putting some numbers to it. CRISIL believes that assuming reforms, 4.5%
of total lender’s exposure of Rs5tn could be at risk. We believe the estimate is
too low, given that ~30% of this debt itself is to large loss making discoms of
financially weak states. (See page 3 for our estimates of possible
restructurings in the power sector).
What do the companies say? Things likely to get much worse before
getting better. Corporate delegates believe that things will get much worse
before getting better. New capacity is unlikely to be set up on a large scale
until sector issues like fuel supply, tariff revision and SEB losses get sorted
out. This may take a couple of years as state governments may continue to
postpone problems until there is no escape. Lenders themselves have
become very cautious while lending to projects, even as promoters are
focussing on finishing existing projects in time rather than building new
capacities. As a result the 100,000MW planned generation capacity addition
in the 12th Five Year Plan is likely to remain a pipedream.
Fuel supply is a critical issue- Capacity for taking imported coal to plants is
a bottleneck. A bigger concern is the stagnating production of Coal India, the
monopoly domestic coal supplier. Increased proportion of imported coal is
likely to significantly increase the cost of production of power, impacting the
viability of projects.
Bottlenecks at policy level as well. The central government is trying to push
state governments to implement reforms but that depends on ‘politics’. State
governments would like to postpone the timing and quantum of tariff hikes as
much as possible. Quality of data available for calculating tariff revisions
needed, is also suspect but info systems are being improved.
What happened in early 2000’s (in the past round of restructurings)? The
principle amount was repaid in entirety. However interest rate was lowered
from ~20% to 8.5% and the penal interest payment also waived.
Outlook
Many of the problems of the sector we believe are built into the current
valuations of power financiers. However sustainable rerating may only happen
once tangible reforms take place on ground.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India power lending
No easy solutions
Event
We went to a discussion on credit quality for power sector lenders organised
by rating agency CRISIL yesterday. The panel members were from CRISIL,
power lenders and corporates. The consensus was on the need for urgent
sector reforms to avert systemic shocks with the hope that the very urgent
nature of problems shocks politicians into action.
Impact
How bad can it really get for the power lenders? The answer: really bad if
no steps are taken, bad if reforms are undertaken now. CRISIL estimates a
tariff increase of 47% is needed for state distribution companies to break
even, given the current losses. This we believe is a large number and it is
unlikely that state governments will have the political will to implement.
Putting some numbers to it. CRISIL believes that assuming reforms, 4.5%
of total lender’s exposure of Rs5tn could be at risk. We believe the estimate is
too low, given that ~30% of this debt itself is to large loss making discoms of
financially weak states. (See page 3 for our estimates of possible
restructurings in the power sector).
What do the companies say? Things likely to get much worse before
getting better. Corporate delegates believe that things will get much worse
before getting better. New capacity is unlikely to be set up on a large scale
until sector issues like fuel supply, tariff revision and SEB losses get sorted
out. This may take a couple of years as state governments may continue to
postpone problems until there is no escape. Lenders themselves have
become very cautious while lending to projects, even as promoters are
focussing on finishing existing projects in time rather than building new
capacities. As a result the 100,000MW planned generation capacity addition
in the 12th Five Year Plan is likely to remain a pipedream.
Fuel supply is a critical issue- Capacity for taking imported coal to plants is
a bottleneck. A bigger concern is the stagnating production of Coal India, the
monopoly domestic coal supplier. Increased proportion of imported coal is
likely to significantly increase the cost of production of power, impacting the
viability of projects.
Bottlenecks at policy level as well. The central government is trying to push
state governments to implement reforms but that depends on ‘politics’. State
governments would like to postpone the timing and quantum of tariff hikes as
much as possible. Quality of data available for calculating tariff revisions
needed, is also suspect but info systems are being improved.
What happened in early 2000’s (in the past round of restructurings)? The
principle amount was repaid in entirety. However interest rate was lowered
from ~20% to 8.5% and the penal interest payment also waived.
Outlook
Many of the problems of the sector we believe are built into the current
valuations of power financiers. However sustainable rerating may only happen
once tangible reforms take place on ground.
