Coal Availability Key to Growth in Power Generation - India Ratings

New Delhi, January 23, 2014: India Ratings & Research (Ind-Ra) has maintained a Stable Outlook on its rated power sector entities for FY15. The Outlook reflects their continued ability to manage the issues associated with fuel and state power utilities (SPUs) due to a favourable tariff mechanism, their comfortable liquidity and support from the central and state governments.

However, the agency has assigned a stable to negative outlook to the power sector for FY15. The outlook reflects the pending policy level issues, manifestation of risks undertaken in earlier years, mismatches in coal demand and supply and continued tariff pressures.

Ind-Ra expects power generation to increase between 5%-6.5% yoy over FY15, in line with Ind-Ra’s GDP growth estimate of 5.6% yoy. The increased generation would be on the back of higher domestic coal availability post the government of India’s initiatives in the coal sector and higher availability and acceptability of imported coal than before. Power generation could also improve on an easing of liquidity situation at the SPU level post financial restructuring package (FRP) implementation as it would lower back-down instructions and increase the ability to buy power. At the same time, cautious bank-lending to SPUs and moderate demand from the manufacturing segments could lead to the energy deficit remaining at 4.5% in FY15, after declining to 4.5% in 8MFY14 (April to November) from 8.7% in FY13.

Given that general elections are scheduled for mid-2014, many states could defer tariff finalisation or even consider reducing tariffs mainly through increasing subsidies. Delhi, Haryana and Maharashtra have announced lowering of consumer tariffs through increasing subsidy. If state distribution utilities are not allowed cost-reflective tariffs and/or receive subsidies in a timely fashion, specially the states which have implemented a FRP, cash flows in the power sector value chain could be impacted. However, favourable tariff decisions could emerge in 2HFY15 after the general elections.

Central Electricity Regulatory Commission in its draft guidelines for 2014-2019 has changed the basis for calculating incentives and disincentives and this could impact the return on equity earned by thermal-based central generating stations. However, positives with respect to water availability and operations and maintenance could partly mitigate the impact. As these are draft guidelines, a conclusive view will emerge post completion of the consultation process currently underway and the finalisation of guidelines.

Ind-Ra expects the sector to witness consolidation through asset buyouts by strategic investors. It would be driven by the government’s initiatives to resolve key issues plaguing the sector. Depreciating rupee and the deleveraging plans of independent power producers have further fuelled investor interest.

Average merchant prices for FY15 are likely to be at FY14 levels at an all-India basis. Prices in the southern power grid have fallen and could decline further post its inter-connection with the national grid during January 2014. Prices may increase intermittently during the pre-election period on account of strong buying interest from SPUs.

(Source: Manager – Corporate Communications and Investor Relations, India Ratings & Research -A Fitch Group Company.)