While positive sentiments last, traders and investors may ride the uptrend cherry picking is required, though
Recent pronouncements indicate political muscle is now being deployed to address the power sector’s woes. The problems are intractable and massive in scale. But this means a revaluation of listed power stocks and a positive impact on share prices.
If the UPA does turn the power sector around, it will have made giant progress. The sector’s losses account for a large proportion of the fiscal deficit (state plus centre). Also poor power equals lower GDP growth.
Power is on the concurrent list, giving states a big say in operation and regulation. Many states have populist schemes, offering free or subsidised power to vote banks. This has bankrupted erstwhile State Electricity Boards (SEBs). Some 27 SEBs have been unbundled into different entities like generators, transmission and distribution (T&D) and trading utilities. Most states have also established State Electricity Regulatory Commissions (S-ERCs) to set tariffs. The splitting of functions makes it easier to understand areas of gross underperformance. S-ERCs make subsidies more visible.
The Central RAPDRP (Restructured Accelerated Power Development and Reforms Programme) offers carrot-and-stick inducements for states to reform. Success has been patchy. The accumulated losses of state distributors were about Rs 8,000 crore by March 2011 and some Rs 28,000 crore of that was incurred in 2010-11.
About two-third of the generation is thermal. Tariffs are low. Fuel costs are rising. Endemic fuel scarcity means lower Plant Load Factors (PLF). Inefficient state plants have PLFs of 65-70 per cent, central and private PLFs of 85 per cent. T&D losses average 30 per cent. Local T&D systems are poor and stealing power is a national pastime. There’s a lack of funds to maintain or upgrade equipment or to pay suppliers. Capital goods manufacturers like BHEL, Coal India have huge receivables. It’s an issue for central utilities like NTPC and Power Grid too.
The demand-supply gap is growing along with GDP. Non-captive capacity is around 185 GW (1GW=1000 MW) at present. The twelfth plan targets an additional 100 GW of capacity with much improved T&D. Over 55 per cent of the twelfth plan capacity is to come from private investment. Around 30 per cent of eleventh plan cap-addition (about 20GW) was private sector. However, private enterprise is now wary of conventional power. There are problems funding projects with banks near sector-exposure limits and suffering large power-related NPAs. Environmental issues prevent exploitation of captive coal blocks. Tariffs are low and in the absence of open access, it’s difficult to deliver power to end-users willing to pay more.
In an efficient market, this would induce more investment across the entire chain. But it’s not an efficient market. Populism means low tariffs and denial of open access. Privatising coal mining is a “no-go” area. Coal and gas imports are expensive. Power-intensive businesses like cement, automobiles etc simply create captive capacity as best as they can.
Prior to NTPC’s IPO, the centre arm-twisted states into tripartite agreements with the RBI to ensure the central generator gets paid. Now the centre is trying to create payment guarantees for Coal India. At the same time it’s assuring thermal generators, via Fuel Supply Agreements (FSA) that the PSU will meet at least 80 per cent of supply commitment. If this works, it will raise PLFs and reduce Coal India’s receivables. Banks may also hope for less sticky loan stresses.
However, there are issues that indicate the FSAs may not work out as hoped-for. Coal India may simply not be capable of delivering the guaranteed quantity. The Indian Railways (IR) logistics will also be stretched and IR’s ability to improve rake turnaround time etc. is in question. The states may also continue their profligate ways. In the current climate, the centre doesn’t really have the clout to accelerate reform processes.
In the middle of this, pockets of growth exist. The focus on renewables has succeeded in pushing a lot of investment into solar and wind. There’s been a dramatic reduction in levelised renewable costs due to various technological breakthroughs and economies of scale. Central PSUs like NTPC and Power Grid are professional. So is BHEL. Power trading has grown quickly despite logistical roadblocks.
The problems will only surface and become apparent a few quarters down the line. Right now, the sentiment is positive. The sector has seen exceedingly depressed share prices for a while. The rebound may exceed run ups across the broad market.
The recent broad market rally has been largely driven by developments in the power sector. While the positive sentiments last, traders and investors may as well ride the uptrend. Cherry picking will be required to find areas where growth is sustainable in the long-term.
It's not the first time, but on many prior occasions I have been accused of getting too extreme with forecasts