Outlook for India's power sector remains negative: Moody's

Faced with challenges like fuel supply risks, cost overruns at private plants and financially weak discoms, India's power sector outlook remains negative, says Moody's Investors Service.
"Our outlook for the Indian power sector remains negative, because the industry faces persistent challenges, mainly resulting from high, albeit moderating, fuel supply risk, cost over-runs at some plants operated by independent power producers (IPPs), and the limited capacity to pay on the part of financially weak distribution utilities," Moody's said in a press release today.
Some independent power producers (IPPs) are also locked into power purchase agreements (PPAs) that have become unviable because they do not allow the high costs of imported fuel to be passed through, it said.

Indian power generators' capacity utilisation will likely be limited by the financial weakness of offtakers, in turn constraining off-take electricity demand, despite growing electricity demand and increasing domestic coal, it added.
For India's NTPC, its unfavourable business conditions are offset by the Indian central and state governments' and the Reserve Bank of India's standing agreement to offset high offtaker risk, and the company's well secured fuel supply sources from domestic and overseas markets.
Low commodity prices will benefit Indian IPPs by making power more affordable for offtakers. However, the offtakers' weak financial profiles pose a risk to timely payments to IPPs under PPAs.

Meanwhile, the high offtaker risk in India will not be addressed over at least the outlook period (next 12-18 months), as the financial profiles of offtakers will remain weak. Some state governments have also not paid all subsidies that the distribution utilities are entitled to; thereby constraining the utilities' liquidity positions.

The long-term viability of the IPPs remains uncertain, without timely tariff compensation.
"India's coal-based power generators will eventually carry additional environmental risk stemming from concerns over the future availability of ground and river water for power generation. As a result, we expect that these generators will see a gradual increase in capex to secure water, to avoid a decline in capacity utilization rat," it said.

Moody's stable outlook for the power sector in Asia Pacific (ex-Japan) is underpinned by steady demand, low input costs for most countries and transparent tariff mechanisms for some countries.
However, lack of a clear resolution mechanism is also
credit negative for the sovereign, Moody's pointed out.
The Rs 25,000-crore allocation for fuel subsidies is sufficient based on current oil prices, it added.
"This is credit positive for state-owned oil and gas companies as it implies that the government will not ask them to share the burden. The authorities are also mulling merging state-owned oil companies, which would ultimately be an overall positive," it said.

The planned increase in public infrastructure spending is credit positive for companies in this sector. It could also help address infrastructure constraints and support future private investment, it said.
Moreover, the Budget is positive overall for business. It has halved income tax rates for lower-income individuals and lowered the tax rate for micro, and small- and medium-sized enterprises to 25 per cent from 30 per cent, Moody's said.