FY19 Outlook: PLFs Unlikely to Fall Further, Visible Improvements in Discoms' Health

India Ratings and Research (Ind-Ra) has maintained a stable-to-negative outlook on the power sector for FY19, despite visible improvements in the financial health of select distribution companies (discoms) and lower dependence of generating companies on imported coal. The improvement in the financial health of certain discoms is attributed to lower transmission and distribution losses, tariff hikes and cost rationalisation.

The stable-to-negative outlook continues to reflect Ind-Ra's expectation of a continued low plant load factor (PLF) of 60%-62% over FY19 for coal-based thermal power plants, because of large capacity additions in the past five years. However, the central government-owned utilities are positioned more favourably than private developers, given their ability to better manage counterparty, fuel and off-take risks.

The agency has maintained a Stable Outlook on most of its rated power sector entities for FY19, as it expects the entities would continue to manage fuel and counterparty risks due to a favourable tariff mechanism, a comfortable liquidity position and support from central and state governments.

Ind-Ra opines cash flows of certain discoms would improve further in FY19, driven by (i) marginal tariff hikes, (ii) increasing proportion of single-part tariff power purchases, (iii) installation of prepaid/smart meters to improve collection efficiency and lower billing errors, (iv) softer merchant tariff rates, (v) continued usage of higher domestic coal than imported coal, and (vi) stable or marginally higher PLFs, leading to lower per unit cost as fixed cost gets absorbed over larger volumes.

The PLFs of coal-based thermal power plants are unlikely to fall below 60% in FY19, even under a blue-sky scenario where in solar addition increases to 18GW annually while a new coal-based capacity of 8GW is added. However, coal-based thermal power plants plants operating at sub 60% PLFs would continue to face challenges in meeting their debt service obligations.

The agency expects India's solar power capacity would expand on account of declining tariffs, lower variability in solar radiation patterns, and hence better PLFs predictability than wind, and government's thrust on solar power. Although the recent imposition of provisional anti-dumping duty on the import of solar panels could result in higher capital costs and thus higher tariffs, solar power would still be competitive than coal.

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