Implementation holds the key in discoms' financial revamp

Power producers like NTPC, JSW Energy, Adani Power and Tata Power can benefit from improved demand and cash-flows, while T&D players will gain from higher demand, provided states undertake measures in true spirit

The central government’s effort to improve the financial health of power distribution companies (discoms) has finally taken  shape, with the unveiling of a revival package. Power producers (such as NTPC, JSW Energy, Tata Power, Adani Power, etc) had been feeling the heat, led by low demand, leading to lower plant load factors (PLFs), or capacity utilisations.

Poor financial health of discoms has been one of the major reasons for the power sector’s woes, especially for power producing companies as well as the banking industry that lent to the financially weak discoms. Hence, steps by the government should prima facie help increase power off-take gradually and benefit power producers, infra players in transmission and distribution (T&D) and the banking sector.

While the government has taken steps twice in the past to revive the sector (but failed as states did follow up with necessary measures and honest intent), the crucial point in the latest package is that moving forward states (those willing to participate in the new scheme) will be responsible for the discom losses (if any) and will take it on their balance sheet. For those not participating, the government has warned banks to not fund fresh losses that discoms might incur. So, this will be a big disincentive for states (political parties) to go for free/subsidised power or not accept the scheme. As economists at Nomura say, this will force state governments (to allow discoms) raise tariffs and enforce financial discipline. Lack of political will to raise power tariffs has been a key reason for the current state of discoms.

But, for the benefits to accrue, the key remains implementation of the plan in true spirit. Analysts at Centrum Broking say a revival in SEB’s financial health by easing its cash flows may revive (power) demand and capex and is positive, but on-the-ground implementation is key as challenges of new restructuring plan vary. Limitation by banks and institutions towards subscription to state government bonds, high aggregate technical and commercial (AT&C) losses, lack of political will to increase tariffs for agriculture consumers, etc., are seen as major hurdles.

Discom package: Gainers all

For instance, a cut in the high AT&C losses from the current 22 per cent to 15 per cent can only happen if: operational efficiency improvements by SEBs like compulsory smart metering; up-gradation of transformers, meters, and others; and energy efficiency measures like efficient LED bulbs, agricultural pumps, fans and air-conditioners, etc; is mandated believe analysts who add that power tariffs will also have to rise substantially from first year itself.

If the measures are taken up seriously, transformer, pump and air conditioner manufacturers as well as other electrical appliances (fans, meters, etc.) manufacturers will benefit substantially.

Ajay Bodke, CEO & chief portfolio manager – PMS, Prabhudas Lilladher Private Limited, says, “Whole host of companies in the T&D space, those which supply distribution transformers, meters, switchgears, instrumentation products, transmission lines, will gain.”

Analysts we spoke to say that companies like ABB, KEC, Kalpataru, Alstom T&D and Crompton Greaves will gain. While there will be others too that will benefit, the advice is to stick to quality names.

T&D players, which are already seeing strong orders from international markets, will be in the sweet spot, as the uptick in domestic demand will add significantly to their prospects. Analysts at Anand Rathi had picked up Techno Electric, KEC International, Kalpataru Power and Skipper in the T&D space.

Nomura believes that while private power producers with low utilisation levels and/or open-ended capacity and/or exposure to distressed discoms i.e. JSW Energy, and Adani Power might see a sharper near-term rally, they prefer NTPC, Power Grid and Coal India in the longer term (as payment security risk through the value-chain ebbs).

Analysts at Centrum Broking say a short-term increase in power demand will be positive for NTPC and Tata Power owing to their long-term PPAs, and PTC India in their coverage universe, though the positives remain factored in. Among their non-coverage universe, Adani Power and JSW Energy, which have high exposure to spot/merchant power market, are seen as key beneficiaries.

There is a word of caution, too, for investors. G Chokkalingam, founder of Equinomics Research & Advisory, says he would not rush to buy stocks but wait for corrections. He believes, large stocks as REC, IDFC, PFC and Power Grid will do better in the coming months. In the smaller category, companies making transformer, transformer oil and cables, should also benefit. But, as history suggests, the first leg of rally usually sees the larger stocks rise and then the ancillary stocks follow. Companies like Savita Oil Technology (transformer oil maker), KEC could be looked at. One could also look at MNC stocks like ABB after a correction, says Chokkalingam.


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