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Liquidity Lifeline For Distributors Is No Panacea For Indian Power Sector

SINGAPORE (S&P Global Ratings) May 18, 2020--The Indian government's loan package for state-owned power distribution companies (discoms) will provide necessary liquidity support for the ailing power sector. However, S&P Global Ratings believes these measures will only provide a temporary lifeline.

India's power generators, renewable energy, and transmission companies regularly face payment delays from discoms--which have highly leveraged balance sheets. The COVID-19 pandemic has further increased liquidity pressure for these companies.

"Discoms have been the key structural weakness for the Indian power industry for decades. State government guaranteed loans could help these companies clear overdue payments, releasing cash to the generation and transmission companies," said S&P Global Ratings credit analyst Abhishek Dangra. "However, a sustainable solution for resolving the weak credit health, excess leverage, and high losses of the discoms is critical to prevent the need for further packages even post-COVID 19."

The government on May 13, 2020, announced that state-owned power sector lenders Power Finance Corp. Ltd. (PFC: BBB-/Negative/--) and REC Ltd. will extend Indian rupee (INR) 900 billion (approximately US$12 billion) in state-guaranteed loans to government-owned discoms. This amount is almost equal to the overdue amount of INR940 billion that the discoms owe to generation and transmission companies.

The expansion of PFC's consolidated portfolio of loans by about 15% as a result of the power sector relief will strain its capitalization. However, we believe PFC's capital position can absorb the impact. As discoms pay dues to transmission and generation companies, the latter could use some of the cash flows to meet their existing obligations to PFC and REC Ltd.

"We believe the risks in PFC's consolidated loan book remain related to the structure of the power sector," said S&P Global Ratings credit analyst Michael Puli.

The financial institution's portfolio concentration in large and generally weak counterparties constrains its credit profile. In some respects, PFC's business model is reliant on the government of India support for collection of outstanding dues to state-owned entities.

Many discoms in India have weak financial health owing to excess debt, loss-making operations, and high transmission and distribution (T&D) losses of more than 15%. COVID-19 exposes them to additional shock in the form of the following:

  • Demand is down 20%-30% during the nationwide lockdown to limit the spread of the pandemic.
  • High power purchase obligations, with fixed capacity charge payments for conventional power and the must-run status of renewable energy.
  • Lower collections from end customers due to disruption in cash collection centers and payment relief to industrial and commercial customers.

We expect power demand to recover, but India is likely to have its first ever power surplus in the fiscal year ending March 2021.

Discoms will face further losses absent higher tariffs and lower T&D losses. These companies will likely continue to rely on support from state governments because many discoms have unsustainable capital structures.

"State government's fiscal measures to offset the impact of the pandemic and to stabilize the economy, coupled with a decline in operating revenue, could weaken states' budgetary performance indicators," said S&P Global Ratings analyst YeeFarn Phua. "The risks to economic recovery and thereby the budgetary position of states will remain elevated for the next one to two years."

State governments' credit profiles and ability to support weaker discoms could therefore come under stress. "Although the headline INR900 billon package appears large, it amounts to just about 0.4% of GDP," said Mr. Phua. "The increased debt burden on state governments will therefore not significantly weaken our assessment on their credit quality. A protracted economic downturn remains the biggest risk to credit metrics of Indian state governments."

Meanwhile, the government has directed central public sector enterprises such as NTPC Ltd. (BBB-/Stable/--) and Power Grid Corp. of India Ltd. (BBB-/Stable/--) to waive about INR30 billion in fixed charges for power not drawn by discoms. Full details of these announcements are still awaited.

"We believe relief from central power generation and transmission companies is a negative intervention by the government in an otherwise strong and independent regulatory framework for India's power sector," said Mr. Dangra. "The relief will likely be small. If it is temporary, it shouldn't do any permanent harm to our view of the power sector's strong regulatory mechanism with a long record of allowing power companies to earn assured regulated returns."

This report does not constitute a rating action.

S&P Global Ratings, part of S&P Global Inc. (NYSE: SPGI), is the world's leading provider of independent credit risk research. We publish more than a million credit ratings on debt issued by sovereign, municipal, corporate and financial sector entities. With over 1,400 credit analysts in 26 countries, and more than 150 years' experience of assessing credit risk, we offer a unique combination of global coverage and local insight. Our research and opinions about relative credit risk provide market participants with information that helps to support the growth of transparent, liquid debt markets worldwide.

Primary Credit Analysts:Abhishek Dangra, FRM, Singapore (65) 6216-1121;
Michael D Puli, Singapore (65) 6239-6324;
YeeFarn Phua, Singapore (65) 6239-6341;
Media Contact:Richard J Noonan, Melbourne (61) 3-9631-2152;

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