Despite regulatory, discom challenges, Sterlite Power bets on demand growth

IPO-bound Sterlite looks at growth in power transmission infra and power equipment industry

Sterlite Power, the power transmission company of the Vedanta group, which has filed a draft offer with the Securities Exchange of Board of India for an initial public offer, is betting on the energy demand growth in the country, despite the setback from Covid-19 and several regulatory challenges.

Sterlite is banking on the large kitty of transmission projects to be offered by the Centre to augment the transmission and distribution (T&D) network across the country and in the states.

The company, which has 26 per cent market share in power transmission projects awarded to private players, filed its draft red herring prospectus (DRHP) on Tuesday. Apart from power transmission, Sterlite also manufactures several power sector equipment including high power conductors, extra-high voltage cables and optical ground wire.

According to latest data available till June 2021, fifty-nine transmission projects have been identified to be offered to private companies via the ‘tariff based competitive bidding (TBCB) of which 31 have already been commissioned or are ready for commissioning and 24 are under construction or partly commissioned.

“Along with such inter-state projects, there will be steady investment in transmission from the state sector as well, primarily driven by the construction of associated transmission systems for upcoming power projects. States such as Maharashtra, Gujarat, Rajasthan, Chhattisgarh, Andhra Pradesh and Karnataka are expected to witness significant investments in the transmission space,” it said in its DRHP.

Another growth area that Sterlite is looking at is connecting renewable energy projects with the national grid. The union government is planning to offer a transmission scheme of 66 Gw of RE projects. The estimated cost of these projects is Rs 43,235 crore.

Speaking with Business Standard in May, Pratik Agarwal, managing director, Sterlite Power, had said close to 80-90 per cent of their projects in India and Brazil are catering to greening the grid.

“The largest green energy corridor project ever auctioned in India – Lakadia Vadodara (Gujarat) – will connect a part of a 30 Gw solar power project being planned in the Kutch region. In Mumbai, we are building a critical line for the city to import solar and wind power from Gujarat. There is an additional line bringing 1,000-2,000 Mw of power to the city. About 70 per cent of our projects are 100 per cent green as they are directly connected to a wind or solar farm or enabling it,” he said.

However, as the power sector in India remains heavily regulated, Sterlite is of the view that this could adversely impact their business. Covid pandemic has exacerbated these issues. In 2020, owing to the pandemic, the Central Electricity Regulatory Commission (CERC) reduced the late payment surcharge for payments overdue from discoms. This impacted the payment to transmission companies such as Sterlite.

Facing the impact of Covid induced lockdown on construction and business activities, Sterlite registered a 26 per cent decline in its annual income for the year ending March 2021 and a 7 per cent decrease in profit, during the same period. The company was in red in FY19.

The company in its filing said the extent of impact of Covid on its future business remains uncertain. One of the significant risks that the company faces is from the power distribution companies, which are its end users and most of them are financially ailing. “The financial health of discoms, macroeconomic factors may negatively impact demand for electricity or more generally the development of power generation projects in India or the timely commencement of their operations, could in turn have a material adverse effect on our growth prospects, business and cash flows,” it said.

In 2011, the CERC revised the payment method for the transmission network, wherein the transmission charge was divided between the power generator and the discoms. However, in almost all cases, the transmission charges of the gencos are also recovered from the discoms. This exposes the transmission service provider to subsequent payment risks from financially beleaguered discoms.

The company is also looking at growth prospects in its cables business and at the same time expansion in the telecom infrastructure. Sterlite has formed a separate company Sterlite Convergence Ltd for providing infrastructure solution for optical fibre network and allied services.

“Transmission lines could also be used for providing telecom services thereby diversifying the revenue profile. The telecom companies could plan low cost and high-quality telecom infrastructure on the existing and planned transmission line infrastructure. This can be done by using technologies such as Optical Fibre Ground Wire over high voltage Transmission line,” it said.