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India Ratings and Research (Ind-Ra) opines that the INR900 billion relief package announced for distribution companies (discoms) under the Atmanirbhar Bharat Abhiyan would boost the credit profile of generating companies (gencos), because it would materially reduce their working capital requirements and consequently the debt taken to fund receivables. This move will benefit all power companies including central public sector enterprise (CPSE) gencos and transmission companies (transcos), independent power producers (IPPs) and renewable (RE) generators. However, the impact could vary across different generating classes and be dependent on the quantum of funds released, ability of discoms to borrow under the scheme and the timeline over which it is implemented. As such, Ind-Ra does not expect any rating changes on account of the expected reduction in receivables.
The Trigger Point: Discom overdues to all gencos increased to INR917 billion as of March 2020 from INR553 billion as of March 2019, while the overdues to CPSE gencos increased to INR309 billion from INR174 billion. The dues are likely to increase further during the lockdown period, given the lower demand and collections seen by discoms. The high receivables for gencos have led to a pile-up of debt and subsequent deterioration in their credit profile.
The disbursement: As per the documents circulated by the Ministry of Power and Power Finance Corporation Ltd., the amount will be lent to discoms in two tranches i.e. 50% in Tranche I and balance in Tranche II by REC Limited (‘IND AAA’/Stable) and Power Finance Corp. Furthermore, the disbursements of loans to discoms are subject to the implementation of reforms such as liquidation of dues and subsidies by state governments, installation of smart meters and improving operational and financial efficiency. These loans will be secured with unconditional and irrevocable state government guarantees covering the loan amount along with interest and any other charges towards the loans. The first tranche could be released to gencos directly, post approval from respective discoms. However, the ability of discoms to borrow under this scheme could be dependent on the headroom available for further borrowings within the working capital limits prescribed under Ujjwal DISCOM Assurance Yojana. In case of lower headroom, the borrowing would be limited to the receivables discoms have from respective states.
A lower-than-expected disbursement, longer timeline for such disbursement and/or each discom’s ability to absorb additional loans would remain key parameters for the impact to be felt in the sector.
Impact of the Package for CPSE Gencos: As part of the package, the Ministry of Power has also asked CPSE gencos to defer the recovery of fixed charges for unscheduled power for the lockdown period. The same would be recovered in three equal interest-free instalments in subsequent months. It has also suggested a rebate of 20%-25% be considered by CPSE gencos on fixed cost and by Power Grid Corporation of India Limited on inter-state transmission charges during the lockdown period. Ind-Ra has analysed the impact of the above capacity charge deferral and receivable reduction on different classes of CPSE gencos. From a generating asset class impact, thermal generators would be hit the hardest in terms of absorption of fixed costs, followed by hydro, nuclear and renewables. The impact on renewables and nuclear is likely to be limited as they operate on a single-part tariff structure and have not seen much unscheduled power, given their must-run status.
Credit Metrics Could See Some Improvement: Ind-Ra had earlier anticipated a consolidated gross leverage of over 6.0x for the rated thermal players and over 4.0x for rated hydro players in FY21. However, the clearance of dues is likely to substantially reduce the working capital borrowings of gencos. As a result, even after considering the hit on fixed charges and deferment of dues, the leverage profile is expected to improve to around 5.7x for thermal and 3.6x for hydro assuming a recovery of 75% on outstanding dues as of March 2020. The improvement would remain contingent upon the quantum of dues recovered. Furthermore, the sector has continued to be plagued by discom inefficiencies, as the ARR-ACS (average revenue requirement- average cost of supply) gap has continued to hurt the sector, given the non-cost reflective tariffs, higher operations and maintenance costs, high regulated assets and non-payment of subsidies by state governments. Therefore, unless there are structural reforms in the sector, the current relief package may limit itself as temporary and the dues could start piling up again.
Fallout of Fixed Cost Relief: Till now, the two-part tariff structure for CPSE gencos has remained unscathed. Given the high capital cost of newer plants, the fixed cost itself has increased over the years. Add to it, the increasing divergence between plant availability factor and plant load factor has resulted in a significant elevated per unit fixed charge for discoms. Thus, power purchase cost for discoms under two-part tariffs is significantly higher than that for renewables in case of low plant load factors. The package opens up a window for discoms to press hard for negotiations on fixed costs. One way to look at the current absorption in fixed cost is the impact it will have on the return on equity of gencos. Ind-Ra estimates that this could result in a drop in the effective post-tax return on equity to 12.6%.
Benefits Likely to be Passed on to Coal Producers: The impact of the outstanding dues was felt across the value chain with coal producers also registering some build-up of dues. Coal companies resorted to measures such as shift towards usance letters of credit from sight letters of credit and discounts on higher grade coal. In addition, due to the COVID situation, coal demand and offtake have been impacted, leading to a decline in profitability metrics. However, with the relief to gencos, coal companies could also get some breather in liquidity.
Impact of Package on Ind-Ra’s Sector Outlook: Ind-Ra had revised the power sector outlook for FY21 to negative from stable-to-negative, on the expectation of an elevated leverage ratio across the value chain on account of rising receivables and muted demand growth. The dues clearance which has remained a key monitorable for all gencos would be a positive step; however, Ind-Ra believes that unless there are structural reforms in the power distribution segment, the problem of mounting dues could become perennial and the current relief would be temporary.