Analysts raise the red flag on rising power volumes and cash-strapped SEBs.
The impending crisis facing the power sector has come to a head now with the bailout demands coming in from numerous state electricity boards. But that may merely be the last straw on the proverbial camel’s back. The sector is fraught with problems from all the sides. On one hand, weak financial health of State Electricity Boards (SEBs) has impacted demand and on the other, fuel availability is posing a big threat to newer projects. To make matters worse, over-supply concerns persist, given the huge capacity coming up in the next two years (27 Gw).
Analysts have been continuously raising the red flag on the impact that rising power volumes would have on cash-strapped SEBs. In the past nine months, the sector has faced grave issues with SEBs opting for back-downs even though power is cheaply available. The matter has come to a tipping point with reports of Tamil Nadu Chief Minister J Jayalalithaa seeking a special package of Rs 40,000 crore to bail out Tamil Nadu Generation and Distribution Corporation (Tangedco) to wipe out the debt burden and bring down accumulated losses.
According to Citi’s research report dated June 15, Tangedco’s accumulated losses have gone up from Rs 4,900 crore in FY06 to Rs 38,000 crore in FY11 and debt has risen from Rs 9,300 crore in FY06 to Rs 40,300 in FY11. Tamil Nadu presently has demand for 11.5 Gw of power, of which only 10 Gw is available. Tangedco purchased 1.8 Gw from the open market (as supplies from Central generating stations and own generations are not at optimum level), which has put substantial financial strain on the company.
Even as power producers are busy putting up capacity and equipment suppliers are increasing capacity, the power story can easily be derailed if SEBs are not bailed out and power rates are not increased. According to ICICI Securities, power demand is likely to grow at seven per cent per annum and the power deficit could come down to lower single digit by FY14. However, this would be painful for non-integrated and merchant players. Integrated players are better placed, but for them realisation and utilisation is unlikely to be exciting. On the equipment side, India is likely to double equipment capacity to 40 Gw by FY14 from 18 Gw. While 40 per cent orders have been placed with the Chinese and other players, analysts believe weakening environment would not only dry-up the order inflows, but also delay monetisation of the existing order book, thus challenging consensus estimates significantly. An improvement in generation outlook may not be able to help the industry given the oversupply.
