SEB restructuring: Positive for power companies, not for banks

The long-awaited restructuring of the power distribution sector, if implemented by the State governments, may improve the financial standing of the distribution companies, allowing them to repay dues to generation and transmission companies. It may also help distribution companies buy more power, and reduce their recourse to load shedding.

Under the package, State governments will assume liability for half of the short-term loans of SEBs. The remaining loans will be re-structured by banks, allowing them more time for repayment. The package also provides incentives to SEBs to reduce their transmission and distribution (T&D) losses. The package will immediately reduce interest costs which make up over a third of distribution companies’ losses. The recent tariff hikes by distribution companies combined with lower interest outgo and reduction in T&D losses will improve the financial standing of SEBs.

Seventeen listed pure-play power companies had receivables of Rs 30,000 crore in March 2012, up from Rs 13,600 crore a year ago. The debtor days of these generation companies also increased from 36 days to 66 days. Debtor days for companies such as Neyveli Lignite, Lanco Infratech and PTC India are upwards of four months. High receivables have increased working capital needs of these companies and pegged up interest costs. The improved financial standing of SEBs may shorten the working capital cycles of these companies.

Power generation through merchant route may improve, too, given that many SEBs are today choosing low-cost power or load shedding, over buying merchant power. The frequency of tariff hikes may also go up as regulators are instructed to review tariffs annually. For private power producers though, a review of their power purchase agreements holds the key to better prospects.

Much of the nearly Rs 2.4 lakh crore accumulated losses of SEBs (March 2012) was funded by banks and financial institutions.

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