Sector Update |6 May 2020
Utilities
Link to our recent reports on
DISCOMs tariff order analysis
DISCOMs – Facing cash issues as demand plummets
India’s power demand declined ~24% YoY in Apr’20 (based on initial daily data). This was
largely due to demand plunging from Industrial and Commercial consumers, which was
partly offset by higher demand from Residential consumers, in our view. Given the (a)
regulated nature of tariff setting, (b) high cross-subsidization by industrial consumers, and
(c) fixed charge payments to generators, the current situation would adversely impact
DISCOMs. Thus, with an extension of the nationwide lockdown (even as some restrictions
are lifted), cash flow issues could heighten.
In this report, we have analyzed financials (based on FY19 financial statements and tariff
filings) for 9 states (comprising 25 public DISCOMs) and accounting for ~57% of the
country’s sales by public DISCOMs. Our analysis suggests that 1.5 months of the current
lockdown would lead to incremental losses of INR55b for these DISCOMs (in 9 states) –
implying a potential overall ~INR100b impact.
45 days lockdown implies ~INR100b incremental losses for public DISCOMs
A look into the financials of 9 states (comprising 25 public DISCOMs) highlights the
existing operational inefficiencies with aggregate AT&C losses of ~20%. Thus, against
an annual income of INR3.9t (excluding exceptional), expenses stood at INR4.2t.
Moreover, the high cross subsidization of Industrial and Commercial consumers’
indicates that the current situation is grave as the demand decline comes from
these high paying industries.
Our analysis suggests the current decline in demand
(24% YoY) for a period of 45 days would imply incremental losses of INR55b for these
states. Power sales by these 9 states account for an est. ~57% of sales by public
DISCOMs. Thus, at an overall level, these losses could be to the tune of INR100b.
We
highlight some of the critical points to consider below:
Impact of high cross subsidization at play
Average tariff for Industrial and Commercial consumers (tariff: INR7.5-8/kWh) is
significantly higher v/s their Agriculture (Tariff: INR1.3/kWh) and Residential
(INR4.7/kWh) counterparts. Given the high level of cross subsidization, Industrial
and Commercial consumers account for ~70% of the revenue (v/s ~50% of volumes)
of these DISCOMS. Thus, with demand decline from these high paying consumers,
revenue from consumer sales (73% of DISCOMs) may decline ~40%, even as overall
volumes dip 24% YoY. Demand from Residential is likely to increase; however,
collection of dues would be crucial, else cash issues may get accentuated.
The hue and cry over fixed charges
With decline in power demand, DISCOMs’ power purchase volumes would also
come down. However, under the current framework, DISCOMs pay certain fixed
charges based on plant availability to generators.
Our analysis of these 9 states
suggests that fixed charges paid by these DISCOMs to thermal plants account for
~24% (INR0.8t) of their total power purchase costs.
According to media articles,
DISCOMs have made representations for a possible cut in fixed costs for generation
companies citing force majeure. However, with no official order by the CERC/
Ministry of Power and difficulty with respect to the implementation of such a cut,
DISCOMs would remain liable for the payment of these fixed charges.
;
Aniket Mittal – Research Analyst
(Aniket.Mittal@MotilalOswal.com); +91 22 6129 1572
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Investors are advised to refer through important disclosures made at the last page of the Research Report.
 Motilal Oswal Financial Services
Utilities
Receipt of tariff subsidy remains critical
With DISCOMs providing power to Agricultural consumers at a low cost, they are
heavily dependent on tariff subsidy from the government.
Our analysis of these 9
states suggests that tariff subsidy accounts for ~17% (INR0.7t) of their total
income.
Thus, receipt of this tariff subsidy from state governments remains crucial
even as states look to balance their finances. Delay in the same could heighten cash
issues for DISCOMs.
Must-run status of renewables
Given the must-run status of renewables, the brunt of the decline in power demand
is being borne by coal generation (-32% YoY in Apr’ 20). While tariffs for renewables
have been on a decline, overall purchase costs remain high (at end-FY19) given the
PPAs signed at erstwhile higher tariffs. Our analysis of these 9 states suggests that
~10% of DISCOMs’ power purchase was from non-conventional sources at a cost of
INR5/kWh.
Measures by states – Lower LPS, rebates and incentives
In an earlier order, CERC had provided relaxation on late payment surcharge,
reducing it to 12% per annum v/s 18% per annum for over-dues arising during 24
th
Mar-30
th
Jun’20. Many states such as Punjab, West Bengal, Rajasthan and Madhya
Pradesh have followed CERC’s stance and reduced the rate of LPS (Exhibit
5).
In
addition, certain states have provided relaxations/moratorium to Industrial and
Commercial consumers on fixed charges, which would further impact profitability
and/or cash issues at DISCOMs. Collection of consumer bills is another issue due to
the nationwide lockdown. Certain states have announced measures to provide
higher rebates and incentivize advance payments. For example, Punjab DISCOM has
launched a scheme to provide 1% interest per month on advance payments by
consumers for FY21 – highlighting the dire need for cash, in our view.
The need for funding remains – Scheme from PFC/REC in works
As the nationwide lockdown gets extended, losses at state DISCOMs would continue
to pile up. DISCOMs would likely, in turn, delay payment to generators. However, an
already high level of receivables from DISCOMs (Exhibit
6)
limits the ability of
generation players to continue absorbing such working capital (WC) crunch. Thus,
funding for DISCOMs to tide over the current situation remains critical amid the
ongoing losses. Media articles have indicated that a scheme from PFC and REC is in
the works to provide liquidity to DISCOMs and pay off its dues to generators.
However, an official statement and details on the same are awaited.
Prefer regulated players with healthy balance sheet; NTPC our top pick
Given the sharp decline in power demand and subsequent cash issues at DISCOMs,
we expect WC issues to materialize within the power sector value chain. However,
regulated entities with a strong balance sheet would be able to tide over this
situation; also, they are compensated for such a stretch in receivables. CERC’s
recent order allays fears on the possible non-levy of LPS in the current scenario.
NTPC remains our top pick within the sector as benefit of the recent capitalization
and better plant availability seeps in. Current prices imply that NTPC trades at 0.8x
FY21E P/BV, which is at ~40% discount to its long-term averages.
6 May 2020
2
 Motilal Oswal Financial Services
Utilities
Exhibit 1: Analysis of 9 states comprising 25 public DISCOMs highlights current high cross subsidization among consumers;
Fixed charges account for ~24% of their power purchase costs while dependence on tariff subsidy is also high
Total Revenue
INR 3.9tn
Total Expenses
INR 4.2tn
Consumer Sales
INR 2.9tn (73%)
Volume: 557 BU
Tariff
Subsidy
INR 0.7tn
(17%)
Other
Revenue
INR 0.4tn
(10%)
Power Purchase
INR 3.3tn (79%)
Volume: 705 BU
O&M &
Others
INR 0.5tn
(12%)
Depreciation
INR 0.1tn
(3%)
Finance
Costs
INR 0.2tn
(6%)
Agriculture
INR 0.2tn (7%)
Volume: 148 BU (27%)
Residential
INR 0.7tn (24%)
Volume: 144 BU (26%)
Other Income/
Op. rev
INR 0.3tn
(84%)
Generation
INR 3tn (91%)
Transmission
INR 0.3tn (9%)
Rate reg.
income and
govt. grants
INR 0.1tn
(16%)
Industrial
INR 1.3tn (46%)
Volume: 179 BU (32%)
Non-Conventional
INR 0.3tn (11%)
Volume: 67 BU (10%)
Conventional
INR 2.7tn (89%)
Volume: 638 BU (90%)
Commercial & Others
INR 0.7tn (24%)
Volume: 85 BU (15%)
Fixed charges
INR 0.8tn (29%)
Other Charges
INR 1.9tn (71%)
Profit before Tax (before exceptions):
INR (0.3)tn
Note: Data is based on FY19 financial statements and tariff filings for DISCOMs from 9 states consisting of Maharashtra, Gujarat, Karnataka,
Punjab, Haryana, Bihar, Rajasthan, Andhra Pradesh and Uttar Pradesh
Source: State DISCOMs, SERCs, MOSL
6 May 2020
3
 Motilal Oswal Financial Services
Utilities
Exhibit 2: Power demand declines as the country has entered lockdown
2020: Daily Power Demand
3,900
3,700
3,500
3,300
3,100
2,900
2,700
2,500
-5.2%
vs. avg.
2017-19 (3 yr avg.): Daily Power Demand
-20.4%
vs. avg.
-15.6%
vs. avg.
Source: NLDC, MOSL
Exhibit 3: Given the current scenario – Our analysis of 9 states comprising 25 public DISCOMs suggests incremental losses of
INR55b for a 45-day period of lockdown – implying a possible INR97b of losses for all public DISCOMs
Indicative P&L for nine states for a period of 45 days
Figures in INR b
Normal scenario
Current scenario
Incremental loss
Revenue incl. tariff subsidy
Power purchase
Fixed charges
Transmission costs
Other power purchase costs
Other expenses
EBITDA
476
(408)
(96)
(39)
(274)
(64)
3
24% drop in demand
338
(331)
(96)
(39)
(197)
(58)
(52)
For 57% of Sales
For 100% of Sales
(55)
(97)
Source: State DISCOMs, SERCs, MOSL
Exhibit 4: Receipt of tariff subsidy for these 9 states critical
5.4%
Tariff Subsidy
Tariff Subsidy % of total state expenditure
3.0%
1.7%
86
74
38
1.6%
115
1.4%
78
1.0%
62
1.0%
103
1.0%
31
1.0%
89
Source: RBI, State DISCOMS, MOSL
6 May 2020
4
 Motilal Oswal Financial Services
Utilities
Exhibit 5: DISCOMs have announced measures given liquidity issues being faced by them and their consumers
State
Measures
Maharashtra
Moratorium on fixed charges for Industrial and Commercial consumers for three months
Bills to be issued on average usage
Punjab
LPS reduced to 6%p.a from 15%p.a for three months
Exemption on fixed charges for Industrial consumers for two months
1% interest per month on advance payments on bills for FY21
Andhra Pradesh
Bills to be issued provisionally as per previous month usage
Rajasthan
Rebate of 0.15-5% on early bill payment for consumers
LPS reduced to interest rate of working capital from Base rate + 400bps for 3 months
Bihar
Higher Rebate of 2% vs. current 1% for 3 months for consumers (petition
filed by DISCOMs)
Karnataka
Deferment on fixed charges for large Industrial consumers for two months
Waiver on fixed charges for MSMEs for two months
Madhya Pradesh
LPS reduced to 9%p.a from 15%p.a for three months
West Bengal
LPS reduced to 12%p.a from 15%p.a for three months
Source: State DISOMs, SERCs, MOSL
Exhibit 6: Cash issues faced by DISCOMs would likely flow through in the value chain;
however, with an already high level of receivables from DISCOMs for generators, the need
for liquidity in the system remains crucial
Overdue o/s to generators
1,000
800
600
400 318
200
0
535
774
Source: Ministry of Power, MOSL
6 May 2020
5
 Motilal Oswal Financial Services
Utilities
NOTES
6 May 2020
6
 Motilal Oswal Financial Services
Utilities
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6 May 2020
8