FY21 power outlook muted, discom dues on the rise, says India Ratings

India Ratings and Research (Ind-Ra) has revised the power sector outlook to negative for FY21 from stable-to-negative.

It attributed this to muted growth in electricity demand and rising dues at distribution companies (discoms) due to the limited improvement in the financial profile of discoms since the launch of Financial Restructuring Plan and Ujwal DISCOM Assurance Yojana (UDAY).

Weakening consumer sentiments due to declining GDP growth could result in subdued power demand for FY21; however, profitability is likely to remain unaffected due to the regulated nature of operations for most of the entities.

However, the rising discom dues are expected to result in an elevated leverage level for the sector. Ind-Ra believes the discom resolution plans have provided lower-than-anticipated benefits, and hence, the focus could shift to the privatisation of discoms, either through the franchisee model or the licensee model.

Ind-Ra estimates a continued muted outlook for thermal plant load factor (PLF; 9MFY20: 55.2 per cent) and expects it to remain below 60 per cent for FY21. Unlike certain other developed global economies which have transitioned away from coal to gas and renewables, India would however, remain dependent on coal.

The low expected PLFs, lack of strong balance sheets in the sector, limited appetite of discoms to tie up long-term power purchase agreements (PPAs) and low project returns would continue to prevent any major fresh project coming up in the thermal sector.

The rating agency expects the renewable capacity addition to remain slow in FY21, on account of i) lower equity internal rate of returns generated by operational plants, ii) limited domestic long-term funding availability post non-banking financial company crisis, iii) continued poor health of discoms, and iv) continuing infrastructure challenges on land acquisition and evacuation infrastructure. Ind-Ra estimates the additions to solar capacity to remain at 5-7GW annually (9MFY20: 5.5GW, FY19: 6.5GW, FY18: 9.4GW), which is healthier than the additions in wind.

It believes that resolution of the stressed thermal assets would remain slow as there are only few commissioned assets left with significant tie-ups on fuel and PPAs, which may see resolution during the coming year.

Around 16GW of under-construction capacity has not seen any resolution till date and is likely to remain a challenge, due to the issues related to the settlement of past capex dues. This capacity, as per Ind-Ra, would remain stressed for a longer period of time or may find resolution only under the National Company Law Tribunal.

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