UDAY: Green Shoots in Financial Performance of Discoms Visible, Although Challenges Remain

India Ratings and Research's (Ind-Ra) initial assessment of Ujwal DISCOM Assurance Yojana (UDAY) scheme suggests that both financial outcome (gap between average cost of supply (ACS) and average revenue realisation (ARR)) and operational efficiency (decline in aggregate technical and commercial losses (AT&C)) have improved at an aggregate level. However, aggregate performance masks wide inter-state variations. The reduction in ACS-ARR gap and AT&C losses observed in FY17 (over FY15) were similar to the trend observed during FY12-FY14. Ind-Ra believes that since different states joined UDAY at a different point of time, with the majority (17 states) of them joining in FY17, the time elapsed since then until now is too short to assess the success of the UDAY scheme.

Ind-Ra believes reduction in interest cost has benefitted discoms' finances. This is estimated to have freed up INR220 billion capital of the banking sector. However, in the medium-to-long-term, an improvement in operational performance such as increased billing efficiency through feeder metering and feeder audit leading to higher collection will be crucial for keeping the discoms' finances healthy. Tighter monitoring of action plan, appointment of nodal officers and state level monitoring committee are also equally important for achieving the desired results.

As of 31 March 2017 (FYE17), 26 states and one union territory have joined UDAY. Nagaland, Odisha and West Bengal have not joined UDAY. Until FYE17, INR2.69 trillion of discoms' debt qualified for restructuring, and the state governments and discoms together issued bonds worth INR2.33 trillion (86.5% of the discoms debt). At FYE17, pending bonds to be issued by the states is estimated to be INR362.78 billion, which are likely to be issued by discoms. Issuance by state government will be subject to the fiscal space of each state according to their state Fiscal Responsibility and Budget Management Acts.

Ind-Ra's assessment indicates that some green shoots have emerged so far as the financial performance of the discoms is concerned due to reduced interest cost and savings in power purchase cost (9MFY17: INR140.89 billion). Chhattisgarh discom turned profitable in 1QFY17, while Gujarat discoms increased their profitability in 9MFY17. Similarly, Haryana discoms turned profitable in 2QFY17 and 3QFY17. These results are encouraging; however, the success of UDAY lies in how quickly discoms of larger states such as Uttar Pradesh, Maharashtra, Tamil Nadu, among others turn around and make their finances self-sustainable. This will also improve the liquidity profile of independent power producers supplying power to these discoms.

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