Sector Update |6 May 2020
Utilities
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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.