15 July 2011
Insights from bureaucrats
Interaction with Tamil Nadu Discom, SERC
Roadmap to achieve financial viability
Post our meetings with Tamil Nadu State Electricity Regulatory Commission (TNERC)
and Tamil Nadu Generation and Distribution Company (TANGEDCO), we have came
assured about impending improvement in TANGEDCO's financials.
Clear roadmap exists to achieve financial viability for TANGEDCO and a clear
consensus amidst authorities on restoring the financial health of the power sector.
This is in line with the key theme in our Sector Update dated June 2011, Utilities:
Just an Eclipse…Brighter Days Ahead, highlighting improvement in SEB finances.
Power sector reforms key priority for government; consumer opinion favors tariff hikes:
There is a clear
consensus amidst authorities on restoring the financial health of the power sector. Load shedding has awakened consumer
opinion in favor of tariff hike and financial independence of TANGEDCO.
Roadmap to achieve financial viability: FY11 estimated revenue gap of Rs90b for TANGEDCO is targeted to
be bridged through:
1. TANGEDCO added capacity of just ~500MW over the last 8 years, leading to increased reliance on short-term
purchases. However, over the 18-month period beginning October 2011, ~6GW of LT capacity would be available
through own generating companies and state share in capacities commissioned by the center. According to TNERC's
August 2010 Tariff Order, TN will become a net exporter of power in FY13 (v/s being the largest buyer, currently).
2. The state government had provided subsidy of INR21b in FY11, including INR2.7b towards the agriculture sector,
which is grossly inadequate. It could increase subsidy towards agriculture by INR30b-35b per year.
3. The local elections would be completed by September/October 2011, post which there could be a tariff increase of
~15%, enhancing annual revenues by INR25b-30b. This would then be followed up with annual tariff petition and
'truing up' exercise every year.
Addressing cash flow issues, exploring LT funding options:
TANGEDCO indicated monthly under-recoveries of
INR7b-8b. Given its corporate status as against a state government body earlier, debt funding is becoming difficult. To
address near-term cash flow issues, TANGEDCO has resorted to load shedding in 2011, which could lower ST power
purchases by 400MW (~30% reduction). Outstanding borrowings stand at INR400b, and PFC and REC's cumulative
exposure is estimated at ~INR150b. Both these companies, however, have an escrow mechanism, and a large part of the
funding is towards generation projects (not as working capital). Additionally, TANGEDCO has term loans of INR170b-180b
from 17-18 public sector banks. These loans are unsecured and largely for meeting working capital requirements.
Lower ST purchases, increase in LT availability negative for merchant players; PFC / REC well covered:
continue to believe that merchant power prices will be under pressure, as TN contributes ~25% of the purchases in the
short-term merchant market and this is likely to decline meaningfully in FY13. According to TNERC's August 2010 Tariff
Order, TN will become a net exporter of power in FY13 (v/s being the largest buyer currently).
PFC / REC
continue to be
our preferred bets, as a play on the theme of 'improvement in SEB finances'. CPSUs continue to be our preferred sectoral
theme, given acceleration in earnings growth and attractive valuations. Our top picks are:
NTPC, Coal India
SEB financials alarming, but the worst seems to be behind:
In our Sector Update dated June 2011, Utilities: Just
an Eclipse…Brighter Days Ahead, we had opined that FY11 would be the peak of SEB losses. With decline in ST power
cost and improvement in availability of LT power, there would be a reduction in SEBs' power purchase cost. This combined
with gradual tariff increase would lead to an improvement in SEB finances. We reiterate our positive stance. For SEBs',
we expect commercial losses to moderate from ~INR685b in FY11 to ~INR466b in FY13.
(NalinBhatt@MotilalOswal.com) +91 22 3982 5429
(AgarwalS@MotilalOswal.com) +91 22 3982 5410
/ Vishal Periwal
(Vishal.Periwal@MotilalOswal.com) +91 22 3982 5417