Cash losses of power distribution companies (discoms) will remain elevated at around Rs46,000 crore this fiscal, or 40% higher than the Rs33,000 crore seen in the pre-pandemic levels of fiscal 2020, due to limited tariff hikes and high interest outgo, says a research note.
In a report, ratings agency CRISIL says, "This is because revenues will remain constrained as demand from high-paying, commercial and industrial (C&I) consumers have been lower than those seen during the pre-pandemic period, while tariff hikes have been inadequate. Costs are also likely to surge primarily because of higher interest burden due to the ballooning debt."
This is as per a study of 34 state discoms from 15 states, which account for over 80% of India's power demand.
The nationwide lockdowns imposed in the first half of the last fiscal brought commercial and industrial (C&I) activities to a standstill and evaporated an estimated quarter of demand from high paying C&I consumers for the full fiscal 2021 as compared to fiscal 2020.
Ankit Hakhu, director of CRISIL Ratings says, "In fiscal 2022, while industrial demand will recover with an expected recovery in industrial activity amid healthy gross domestic product (GDP) growth, forecast at 9.5% on-year, commercial demand will remain subdued as people remain cautious in stepping out of their homes. Consequently, we expect C&I consumers to account for a lower, around 48% of demand in fiscal 2022, compared with 51% in fiscal 2020."
This, according to the ratings agency, would lower contribution of the C&I segment, which pays Rs3-4 per unit more compared with agriculture and domestic consumers, and will constrain overall realisations for the discoms.
"This and tariff hikes by just six out of 15 state discoms analysed, would translate to a mere 1-2% increase in average realisations from fiscal 2020 levels," it added.
Operating costs of discoms may also inch up about 3% over fiscal 2020 because of higher power purchase cost driven by pricier coal, transportation and steady increase in the administrative costs. Diesel prices are up over 35% from fiscal 2020 levels.
“Further denting the cash flows will be, a more than 30% surge in interest cost as discoms take debt largely under the Aatmanirbhar Bharat scheme, to repay older dues of generation and transmission companies. This is a higher cost debt with interest cost around 50-100 basis points higher than the average cost of debt of discoms. Debt will also be taken to fund the ensuing cash losses and capital expenditure. We expect debt to surge to Rs5.3 lakh crore this fiscal," says Aditya Jhaver, director of CRISIL Ratings.
Consequently, the ratings agency says, constrained realisations along with limited tariff hikes coupled with higher interest and operating costs is expected to expand discom losses yet again this fiscal – by a good 40% over fiscal 2020 levels.
This also means expansion of the operating gap from an estimated 56 paise in fiscal 2020 to 67 paise in fiscal 2022. Government support in the form of subsidy inflows and prior period loss funding will provide some support to the discom cash flows, given that power distribution is critical for the state.
"However, given the past track record of delay in receiving subsidies, we do not expect any substantial increase in support in the current fiscal," CRISIL says.
According to the ratings agency, continuing cash losses are one of the main reasons for the existing weak credit profiles of state discoms and make structural reforms critical to their sustainability.
"Our projections are sensitive to a third wave, further lockdowns, or slowdown in the pace of vaccinations. Timely support from states is also a monitorable," it added.