Bloomberg News

Power Rally Fizzles as Subsidies Weigh on Debt: Corporate India

September 27, 2012

A rally in India’s power stocks spurred by a government proposal to slash $30 billion of state distributors’ debt has stalled amid concern reluctance to cut subsidies will prevent its implementation.

The BSE Power Index (BSEPOWR), comprising 17 utilities and manufacturers, surged the most in seven months in a three-day advance as the federal cabinet on Sept. 24 allowed state electricity suppliers to raise tariffs as part of a plan to revamp their short-term loans and help meet supply commitments. The gauge has dropped from a five-month high as Fitch Ratings said benefits from the plan hinged on strong political will for meaningful reforms.

Populist measures to win votes by shielding consumers from higher electricity charges and a widening gap between cost of supply and collections have resulted in 2.46 trillion rupees ($46 billion) of losses as of March 2012. Companies that buy power from generators such as NTPC Ltd. (NTPC), Asia’s largest by value, and Lanco Infratech Ltd. (LANCI), can refinance as much as 1.6 trillion rupees of their loans and access fresh funds in an offer aimed at reducing blackouts.

“This plan is not a gift from the central government; the states must fall in line for it to work,” NTPC Chairman Arup Roy Choudhury said yesterday in a telephone interview. “The plan to enhance their liquidity should benefit all utilities, but we have to give it some time to see if the states will succeed in implementation.”

‘Best Terms’

Lanco, India’s second-biggest non-state producer, was the best performer on the index during the three days through Sept. 25, jumping almost 13 percent, while billionaire Gautam Thapar- backed Crompton Greaves Ltd. (CRG), a maker of transformers and switchgears, gained 11 percent, according to data compiled by Bloomberg.

The power index climbed 6.6 percent in the period to 2,033.49, its highest level since April 24, before dropping 0.6 percent.

Under the debt revamp plan, 50 percent of the short-term borrowings of the state utilities will be taken over by regional governments, while the rest will be reorganized by lenders on the “best possible terms,” according to the government.

The loans taken over by regional governments will first be converted into bonds, guaranteed by the state authorities, before being sold to lenders. The governments will repay the utilities for the bonds over two to five years. The plan will include steps to improve operational efficiency.

Boosting Valuation

A successful implementation of the proposals is crucial to recovering money from the cash-strapped distributors and help Lanco boost its valuations when it is trying to sell a stake in its power business, said K. Raja Gopal, chief executive officer of the company based in Gurgaon near New Delhi.

The electricity boards of Uttar Pradesh, Karnataka and Tamil Nadu owe Lanco a combined 12 billion rupees, he said.

“Our own financial condition and that of the electricity boards still depends on the states’ plans,” said Gopal. “We are earnestly hoping that the center’s plans fall into place locally.”

Lanco is seeking to raise as much as $750 million from private equity investors, it said in January. Total debt of Lanco has risen almost ninefold to 280.4 billion rupees from four years ago, while the company reported a loss of 1.1 billion rupees in the 12 months ended March 31. Shares have slumped 82 percent from a December 2007 record.

Core Issue

Local administrations may be reluctant to increase electricity tariffs as at least 10 states face elections this year and next before the nation goes to polls to choose a central government in 2014, said Daryl Philip, an analyst with Mumbai-based Finquest Securities Pvt.

“Restructuring loans will happen, but the core issue here is to increase tariffs, and that’s the toughest part of the deal,” said Philip.

Most state utilities often adhere to political demands of the local governments by providing free or cheap power to people. Punjab and Haryana, two of India’s biggest producers of food crops, provide subsidized power to farmers. Some utilities don’t receive subsidies announced by governments in lieu of free power they give to farmers, according to Salil Garg, a New Delhi-based director at Fitch Ratings.

“In light of the political sensitivity of the issue, strong political will across various state governments will be needed to achieve meaningful reform,” Fitch said in a statement yesterday. “The long-term benefits will only materialize if the state electricity boards meet their milestones on tariff rises and reducing the large operational inefficiencies that lie at the core of the problem.”

Biggest Blackout

States, including Tamil Nadu, Andhra Pradesh, Punjab and Karnataka, have increased tariffs since April to reduce the gap between cost and sales. Tamil Nadu increased tariffs after almost a decade.

Almost 27 percent of India’s electricity is lost in transmission because of dissipation through wires and theft, causing a peak shortfall of 9 percent. Distribution utilities, unable to retrieve their costs through tariffs, accumulate debt and losses and cut purchases of electricity, leading to blackouts. Grid collapses on two consecutive days in July caused the world’s biggest blackout.

Beat Targets

NTPC was forced to cut generation by 13 billion kilowatt hours, or 6 percent of total production in the year ended March 31, as state government utilities reduced purchases, Chairman Choudhury said.

The state-owned generator may not have to cut output this fiscal year should the debt revamp plan succeed, said Chirag Shah, an analyst at Mumbai-based ICICIdirect.com.

“Instead it can increase volumes and beat its generation targets,” he said. “State and private generating utilities stand to gain the most if states are able to increase power purchases.”

Successful implementation may help PTC India Ltd. (PTCIN), the nation’s biggest power trader, recover 15 billion rupees, freeing up its balance sheet, said Shah. PTC surged 11 percent in the three days to Sept. 25, before dropping 1.2 percent in the following two days of trading in Mumbai.

Tamil Nadu and Uttar Pradesh states owe PTC about 16 billion rupees, Shah said. That is about 80 percent of the company’s 20 billion rupee market value.

Punjab State Power Corp. has 200 billion rupees of liabilities, half of which is short-term and being considered for restructuring, Finance Director S.C. Arora said last month. The distributor lost 0.07 rupees on every kilowatt hour of electricity it sold last year, he said.

Increasing losses at state utilities are also endangering investment in power projects in states, as concerns mount that generation companies may find it difficult to recover their dues from utilities.

“All that’s happened is that the Cabinet has approved a plan; that still has a long way to go,” NTPC’s Choudhury said. “We can still only generate as much as states are willing to draw. There’s still a lot that needs to happen before we can start thinking otherwise.”

To contact the reporter on this story: Kartikay Mehrotra in New Delhi at kmehrotra2@bloomberg.net

To contact the editor responsible for this story: Sam Nagarajan at samnagarajan@bloomberg.net


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