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UBS Investment Research
Rural Electrification
TN SEB US$9 bn bailout
„ Event: TN government approaches centre for $8.8 bn bailout for its SEB
In a meeting on June 13
th
, Tamil Nadu (TN) state CM met with PM to discuss fund
allotment for state of TN. Amongst the demands is US$8.8 bn bailout for TN state
electricity board (SEB). TN is the largest contributors to overall SEB losses at
17 %( as of FY09) and has accumulated losses of US$8.4 bn currently.
„ Impact: REC has 13% exposure to TN SEB
As of FY11, REC has exposure of Rs 110 bn to TN (13% of loan book). As per the
management currently TN SEB is making regular payments on time and part of the
exposure is covered by state government guarantee apart from escrowed
receivables. In our view probability of default is minimal, however risk of
restructuring has increased. We do not expect principal haircut/loss however
reduction of interest rates is a possibility which could lead to NPV loss.
„ Action: Valuation pricing in stress
Recent tariff hikes in MP (10.6%), Bihar (20%), Orissa (19.6%), Rajasthan (20%
proposed) are positive developments in our view towards improving financial
health of state utilities. We believe its unlikely that listed central government
entities (PFC,REC) will bear the cost of inefficiencies of state utilities. Our
Utilities analyst Pankaj Sharma believes this is a pressure tactic by TN government
and tariff hike is likely to be a more rational outcome. We maintain our positive
view on REC (also PFC) as due to attractive valuations.
„ Valuation: Maintain BUY
Our PT of Rs 300 derived using residual income model implies 2xFY12 book.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Rural Electrification
TN SEB US$9 bn bailout
„ Event: TN government approaches centre for $8.8 bn bailout for its SEB
In a meeting on June 13
th
, Tamil Nadu (TN) state CM met with PM to discuss fund
allotment for state of TN. Amongst the demands is US$8.8 bn bailout for TN state
electricity board (SEB). TN is the largest contributors to overall SEB losses at
17 %( as of FY09) and has accumulated losses of US$8.4 bn currently.
„ Impact: REC has 13% exposure to TN SEB
As of FY11, REC has exposure of Rs 110 bn to TN (13% of loan book). As per the
management currently TN SEB is making regular payments on time and part of the
exposure is covered by state government guarantee apart from escrowed
receivables. In our view probability of default is minimal, however risk of
restructuring has increased. We do not expect principal haircut/loss however
reduction of interest rates is a possibility which could lead to NPV loss.
„ Action: Valuation pricing in stress
Recent tariff hikes in MP (10.6%), Bihar (20%), Orissa (19.6%), Rajasthan (20%
proposed) are positive developments in our view towards improving financial
health of state utilities. We believe its unlikely that listed central government
entities (PFC,REC) will bear the cost of inefficiencies of state utilities. Our
Utilities analyst Pankaj Sharma believes this is a pressure tactic by TN government
and tariff hike is likely to be a more rational outcome. We maintain our positive
view on REC (also PFC) as due to attractive valuations.
„ Valuation: Maintain BUY
Our PT of Rs 300 derived using residual income model implies 2xFY12 book.
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