Institutional Equities - Online Share Trading

Institutional Equities
Key operational issues in power sector and our view
Mounting losses of SEBs denting power demand
State electricity boards’ (SEBs) losses have almost doubled from US$6bn to US$12bn in the past three years
due to increase in the spread between average cost of supply and average power tariff and T&D (transmission
and distribution) losses. This has led to lower demand from SEBs for merchant power at a higher price.
Recently, the government passed a resolution to arrest and reverse growing losses of SEBs. As per the
resolution, SEB loans will be converted into equity to improve their networth, pass-through of any increase in
power purchase costs, state governments to release subsidies to discoms for ‘below cost’ power supply to
agriculture and rural households in advance and opening up of discoms for competition through input-based
distribution franchisee system. We believe the worst is over for SEBs and going forward, their finances will
gradually improve due to increased power availability via long-term contracts, tariff hike and lower T&D losses.
Exhibit 45: Yawning gap between ACS, ARR
Rs/unit FY07 FY08 FY09
Average cost of supply(ACS) 2.76 2.93 3.4
Average revenue realised(ARR) 2.27 2.39 2.62
Revenue GAP (0.49) (0.54) (0.78)
Gap with subsidy 0.25 0.23 0.33
Gap on revenue and subsidy realised basis 0.34 0.35 0.6
Source: PFC, Nirmal Bang Institutional Equities Research
Exhibit 46: SEBs’ losses
FY07 FY08 FY09
Power distribution companies (Rsbn)
Total income (excluding subsidy) 1,319 1,495 1,704
Total expenditure 1,599 1,836 2,213
PAT (without subsidy) (279) (342) (506)
PAT (with subsidy) (151) (178) (322)
Subsidy received 128 165 184
Subsidy as a percentage of revenue (%) 9.7 11.0 10.8
Subsidy booked 136 195 297
Subsidy as a percentage of revenue booked (%) 10.3 13.0 17.4
Genco, transmission and trading P&L A/c (Rsbn)
Total income (excluding subsidy) 812 862 961
Total expenditure 795 833 974
PAT (without subsidy) 11.6 22.0 (20.0)
PAT (with subsidy) 11.9 22.0 (20.0)
Total SEB losses (Rsbn)
Total income (excluding subsidy) 2,131 2,357 2,665
Total expenditure 2,394 2,669 3,187
PAT (without subsidy) (267) (320) (526)
PAT ( with subsidy) (139) (156) (342)
Total debt (Rs trn) 1.28 1.54 2.4
Source: PFC, Nirmal Bang Institutional Equities Research
Pressure on merchant power tariff to continue
Merchant power rates primarily depend on the deficit level (difference between demand and short-term power
supply). During 1QFY11, merchant power tariff declined from Rs7-8/unit to Rs3-4/unit (barring assembly
election states) due to decline in the deficit level. As significant power generation growth is expected across
central and state government utilities and the private sector, we expect the base deficit to decline meaningfully
in FY13. Hence, we believe the pressure on merchant rates would continue in future and we have factored in
Rs 4.25/unit for FY12 and Rs 4.00/unit FY13 in our model.
20 Infrastructure Sector