The soaring receivables from Telangana and Andhra Pradesh distribution companies (Discoms) have weakened the internal liquidity of many projects and necessitated a reduction in their debt service reserve accounts.

According to India Ratings and Research (Ind-Ra) projects with resourceful sponsors and adequate internal liquidity are likely to withstand the emanating stress and ride over this difficult period.

However, projects with partially or fully depleted resources would face a rating action. Therefore, the importance of adequate internal liquidity is coming to the fore again.

In 2016, the state power utilities of Telangana and Andhra Pradesh paid ahead of time and availed rebates. In view of the surge in receivables now and other underlying issues such as tariff non-revision, the power utilities of these states have become fallen angles.

The challenges to projects increase in the absence of an approved working capital line. Working capital debt provides projects liquidity cushion, helping in deferring the liquidity strain. In the event of a deficient power generation, challenges could increase and subsequently affected project debt serviceability.

Although project developers acknowledge counter party delays are common, increasing instances and prolonged period of non-payment cause serious concerns.

In Ind-Ra’s experience, counterparties such as NTPC, NTPC Vidyut Vyapar Nigam Limited and Gujarat discoms continue to pay within the 30-day period. Solar Energy Corporation of India has slipped from its earlier payable bucket of within 60 days to 75 days at end-March 2019. Although the slip by Solar Energy Corporation of India is not a major concern, it does not allay fears of further delays.

Ind-Ra’s rating experience suggests there is no easy solution to the current quandary of projects based in Telangana and Andhra Pradesh. Nevertheless, the agency considers additional/adequate liquidity and approved working capital line ahead of time essential for projects.

The dependence of the discoms in Andhra Pradesh and Telangana on state support is significantly increasing year-on-year. This trend is a significant credit concern, considering delayed payments to the discoms could lead to a huge cash flow gap for the discoms.

On January 30, 2019, NTPC notified that the pending dues (outstanding beyond 60 days) from the power utilities in Andhra Pradesh and Telangana were Rs 2200 crore and Rs 1300 crore, respectively. Payments pending to NTPC also indicate cash flow stress.