Published on 23/01/2020 3:12:59 PM | Source: ICICI Securities Ltd

Power Sector - Consolidation begins; stress to reduce further By ICICI Securities

Posted in Broking Firm Views - Sector Report| #Power Sector #Sector Report #ICICI Securities #

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Consolidation begins; stress to reduce further

In our recent reports, we have been highlighting that since the RBI’s June’19 circular, stressed asset resolutions have seen a significant pick up in pace. Of the 43GW stressed coal-based power plants with a total debt of ~Rs2trn, 16.2GW have already been resolved. Of this, 6.8GW was due to coal allocation under SHAKTI scheme and 6.8GW was sold to new buyers. As per our analysis, 9.9GW with a total debt of Rs330bn will be scrapped as no material progress has been made, while another 7.5GW will be resolved over the next 8-12 months, as they are under various stages of discussions/bidding for revival. We believe this is a positive move for the sector as this consolidation phase will lead to top 5-6 players with strong balance sheets to remain invested in the sector, with relatively low leverage, and can withstand the working capital pressures due to delayed discom payments. We expect 50-55% of the total debt of Rs2trn to be recovered by the lenders of 43GW under stress. This development is positive for private companies, which have won assets in the recent bids at Rs30-40mn/MW as against replacement cost of Rs60-70mn/MW. This is also positive for power sector lenders. Recent measures taken by the RBI, govt. and lenders to fast-track resolutions:

* Shakti scheme helped in allocated linkage to plants with PPAs to which 27mnte was made available from Coal India as slight premium to notified prices (much lower than imported prices or e-auction prices)

* RBI’s June’19 circular allowed more leeway to resolve the issues that helped maximize recovery in a time-bound manner

* Coal linkage auction made available for merchant power plants

* Recent announcement of coal block auctions without end-use criteria

* Nodal PPA coming up for 2,500MW in Tranche II after the commencement of 1,900MW in Tranche 1


Status of 43GW stressed assets:

* 16.2GW has been resolved with a debt of Rs756bn which has recovered 75% o 6.8GW resolved with Shakti linkage made available

1) debt of Rs289bn (no haircut) o 6.8GW resolved by sale to new buyers

2) debt of Rs372bn (56% recovery) o 2.6GW resolved by settlement with current promoters

3) debt of Rs96bn (recovery of 72%)

* 7.5GW at advanced stage of resolution with debt of Rs400bn (we expect 60-65% recovery) o 3.3GW resolution underway with current promoters o 4.2GW bids under way

* 8.9GW with a debt of Rs450bn is expected to commence the resolution process soon in/outside NCLT (expect 55% recovery) o We expect 2.4GW to be resolved outside NCLT

* 9.9GW with a debt of Rs330bn is not expected to get commissioned as even the BTG is not installed in most of the plants (expect 10-15% recovery)

As the Indian power sector witnesses a major transformation with respect to long-term demand growth (despite the recent slowdown due to seasonality), energy mix and market operations, we reiterate our positive stance on the sector. We believe capacity utilisation will improve significantly over the next three years with the signing of new PPAs and encouraging demand growth of 4.5-5-5% (despite re-basing on loss reduction and various energy-efficiency initiatives). This will be positive for power financiers and asset owners, while the next leg of reforms expected in the distribution space may lead to revival in power capex. With this leg of consolidation, the generation segment will be majorly owned by 4-5 PSUs and 5-6 larger private players wherein synergy benefits will be visible of reforms such as flexible coal utilisation and merit order dispatch leading to cost savings for discoms as well. It will also reduce working capital stress as weaker players sell out.


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