The power companies lit up an otherwise ordinary session in the markets on Monday and the main reason was a 37 percent hike in power tariff after nine years by the Tamil Nadu state electricity boards. The biggest issue with the power sector today is arguably the weak financial condition of state electricity boards. No doubt, the 37 percent hike came as a relief to the sector.
S K Tuteja, member, Shunglu committee (which recently submitted report of the SEB sector) told CNBC Tv 18 that the move was encouraging. "But we need to get more private investment in the distribution sector and improve the technology for the private distributors to minimise their transmission and distribution losses."
It is also evident that the price hike cannot remain an ad hoc move and such hikes will be required on an annual basis. The tariff hikes and better implementation of technology is required to facilitate restructuring of almost Rs 80,000 crore worth of loans that the SEBs have. Tuteja said, " The concern of the lenders are genuine and restructuring can happen only if there are hikes across all states. Restructuring can be negotiated in case by case basis, but it can only happen if there are hopes of improved conditions and better functioning of the SEBs in the future."
REC, one of the biggest lenders to the sector, has an exposure to Tamil Nadu of Rs 9,000 crore, Andhra Pradesh of Rs 6,000 crore and Rajasthan of Rs 1000 crore. In Uttar Pradesh, its exposure is at Rs 6,000 crore.
HD Khunteta, director, finance of REC told CNBC-TV18 that "Asset quality is positively impacted as the chances of default can almost be done away with with the rise in prices. Even states like Orissa and Andhra Pradesh have raised tariffs by 12-25 percent. The increase in cash flow is a positive for REC therefore."
So who will benefit the most and who will lose out?
Harshvardhan Dole, analyst IIFL explained the repricing will benefit PTC the most which had seen substantial expansion in working capital needs due to fall in cash flow. Tamil Nadu has been holding back payment to many wind generators who will also benefit.
But with better implementation of policies, spot sales of power could go down but it will improve predictability of cash flows. "The generation companies must get into long or medium term contract to sell power and spot sales must be minimised. That helps all the stakeholders in the power segment," said Dole.