India Ratings has downgraded Tamil Nadu Generation and Distribution Corporation Limited’s (TANGEDCO) outlook to negative on account of higher leverage due to liquidity stress in the absence of tariff revision, coupled with inadequate cash position.

The Fitch Group company has downgraded the state's term loans to BBB, which it classifies as being in the negative area. The negative outlook reflects the ratings agency's expectation of higher leverage and liquidity stress in the absence of tariff revision. TANGEDCO is 100 per cent owned by the Tamil Nadu government.

Distribution companies (discoms) in Tamil Nadu, along with other states like Andhra Pradesh, Telangana, Rajasthan and others have ₹74,700 crore.

While power generation has been stable, this increase in dues is due to a combination of factors - from inaccurate billing, non-collection of payments to continued high Aggregate Technical and Commercial (AT&C) losses.

Against the AT&C loss target of 13.5 per cent under Ujwal Discom Assurance Yojana (UDAY) scheme, TANGEDCO has achieved only 14.23 per cent, leading to the further widening of losses for FY20. The collection efficiency dropped to 97.78 per cent in FY18 from 100 per cent in FY17. UDAY scheme was announced by the centre to free discoms from debt.

“Every state has different T&D losses, and it is assessed randomly, which needs to be standardised” according to Rupesh Sankhe, Vice President, Institutional Equity Research, Elara Capital.

Meanwhile, TANGEDCO’s debt service coverage ratio (a measure of cash flow available to meet current debt) and interest coverage ratio was under 1x over FY14-FY18. As per the revised estimates for FY19, the discom’s interest coverage ratio was 0.10x when compared to 0.26x in FY18, as a result of the increased interest burden. Lenders routinely assess a borrower's debt service coverage ratio before making a loan. A debt of less than 1 means negative cash flow, which means that the borrower will be unable to cover or pay current debt obligations without borrowing more.

TANGEDCO’s total debt increased to ₹79,630 crore in FY18 from 65,897 crore in FY17. Its cash balance was ₹1,390 crore at FY18 when compared to ₹1,438 crore in FY17. This cash position is inadequate to service debt without state support.

Further, the discom consistently utilised nearly 80 per cent of its working capital limit of ₹3,543 crore, during the 12 months ended September 2019.

Also, TANGEDCO’s debtors’ collection period was consistently more than 300 days over FY16-FY18 and India Ratings expects the collection period to remain high in near-term. The debtors include the receivable from the supply of power and other trading and claims receivables.

Given the lower margins, nearly stagnant power sales and widening losses per unit, India Ratings expects the liquidity profile to stay strained over the next 1-2 years.

Add to it, the state economy continues to lag behind national growth. The state has grown at a CAGR of 6.3 per cent in the FY12-FY19 period, lower than the all-India CAGR of 6.9 per cent during the same period.