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The Ministry of Power (MoP) scheme to liquidate overdues that distribution companies (discoms) owe generation companies (gencos) can release the past receivables of the renewable energy (RE) sector of Rs 9,000 crore over the next two fiscals.
That could improve the receivables period of leading RE gencos by 40-50 days from the current ~180 days, and improve the equity returns of some projects by up to 1 percentage point, a CRISIL Ratings analysis shows.
Payment stretch has been one of the key risks for the RE sector. In March 2022, leading RE gencos had receivables of about six months (similar to March 2019 level) despite an increase in the share of central counterparties — which clear payments within 30 days of due date — in their operational portfolio.
The receivables’ stretch has been caused by delays in payments by select state counterparties such as Maharashtra, Rajasthan, Madhya Pradesh, Telangana, and Tamil Nadu. These have a high proportion in the offtake mix of RE gencos, with receivables of 8-14 months over the past three fiscals.
The problem is compounded by the unpredictable payment profiles of discoms, with large variations. For instance, the receivables cycle of the Telangana discom rose to ~400 days as on March 31, 2022, from ~250 days as on March 31, 2019, while for the Maharashtra discom, it surged to ~300 days from 70 days.
Such stretch can cause cash-flow mismatches for RE gencos, which rely on liquidity buffers and working capital to service their own debt. It forces them to go for additional working capital, the cost of which depresses equity returns.
Under the proposed scheme, dues including late payment surcharge as on the cut-off date of June 3, 2022, will be converted into monthly instalments that discoms will pay over the following 12-48 months. That would translate to immediate liquidity gains for RE gencos, and can lead to better payment profiles.
Says Manish Gupta, Senior Director, CRISIL Ratings, “The Rs 9,000 crore of liquidated dues can support equity investments in 24 gigawatt of under-implementation projects over the next two fiscals. Our calculation presumes financially stronger discoms — such as in Gujarat and Maharashtra — would show better payment periods for RE projects compared with others that are expected to pay with an average delay of 3-5 months.”
Of the 40-50 days improvement envisaged in the receivables cycle of RE projects, nearly half is expected to be because of this dues liquidation scheme.
Further, RE gencos analysed by CRISIL have benefited in the past from a rise in the share of central counterparties (up to 40% last fiscal from less than 25% in fiscal 2019) in their operational portfolio.
Says Ankit Hakhu, Director, CRISIL Ratings, “The share of central utilities is expected to increase further to ~55% over the next two fiscals as a majority of the capacity to be commissioned has power purchase agreements tied up with central counterparties. This is expected to contribute the balance projected decrease in receivable days of 40-50 days by March 2024.”
That said, such schemes can provide only temporary liquidity relief till a long-term solution to tackle the financial and operating problems of state discoms is chalked out.