DISCOMs liquidity package – Money trickling through
WC limits for DISCOMs relaxed; Focus still on initial ~INR900b package
* Power generators have been struggling with mounting receivables as over-dues from DISCOMs continue to rise. Against this backdrop, news flow over the relaxation of working capital (WC) limits for DISCOMs has led a run up in power stocks with expectation of possible easing of WC for generators too.
* While positive, our interaction with REC suggests that the focus still remains on the initial INR900b package announced under the ‘Atmanirbhar’ scheme. WC funding over and above these levels will depend on multiple factors, despite the rise in borrowing limits.
* Nevertheless, we note that money has been flowing through from the INR900b package and is positive. Within our coverage universe, stocks such as NTPC, JSW Energy, Tata Power (in particular its renewable arm TPREL) and Coal India could benefit if receivables normalize. Update on these aspects highlighted below:
Cabinet approves one-time relaxation for DISCOMs
* According to media articles, the Union Cabinet has approved a one-time relaxation of WC limits for DISCOMs (see here: Link). As part of the ‘UDAY’ scheme, DISCOMs were allowed to borrow up to 25% of their previous year’s revenue for WC. Given the current impact of COVID-19 on DISCOMs, this limit has been relaxed. Accordingly, PFC and REC can now extend funds to DISCOMs for whom the limit was earlier a hindrance.
* According to our interaction, Tamil Nadu (TN) can be a key beneficiary. The move would help sanction loans from TN (est. INR140b), which earlier required a central government/ministry approval.
* Given the current context of rising over-dues from DISCOMs for power generators (Exhibit 1), this news brings in some relief. Amount under the INR900b scheme is directly paid to generators on behalf of the DISCOMs.
INR900b relief package trickling through
* The INR900b liquidity infusion package from PFC and REC has started trickling through. According to our interactions with REC and industry players, approvals of ~INR680b for states have been sanctioned. Of this, ~INR236b has been disbursed under Tranche-I (50% of amount).
* Disbursal process for some of the other states has seen delays given the state government guarantee approvals. Our interaction suggests that this should flow through as state guarantees come in (especially for Jammu & Kashmir, which is now a Union Territory).
Incremental funding depends on multiple factors
* Our interaction with REC indicates that there is no official communication to raise the ‘Atmanirbhar’ package (from the current ~INR900b at end-Mar’20).
* WC lending under the ‘Atmanirbhar’ package to DISCOMs is ~100bp lower than its normal rates. Lending for incremental WC above these limits could imply higher interest costs for DISCOMs and impact of the same would need to be taken into account by them.
* Moreover, incremental WC lending by REC may require more state guarantee issuances by DISCOMs and further disclosures (such as audit of half-yearly financial statements).
* According to REC, the current focus remains on the disbursal of the initial INR900b package. Disbursal of Tranche-II will need to be watched as it is dependent on conditions related to (a) DISCOMs providing facility for digital payments, (b) liquidation of state government dues to DISCOMs, (c) clearing of unpaid subsidies, and (d) a plan for reduction in AT&C losses.
WC relaxation a positive, but addressing broader issues critical
* The relaxation of WC limit would aid liquidity and could help control the stretch in receivables at generators. However, continued DISCOM losses remain a concern and addressing operational issues for DISCOMs is key from a longer term perspective.
* Companies within our Utilities Universe remain attractive (Exhibit 6). Money flowing through from the ‘Atmanirbhar’ scheme is a positive. Further liquidity to DISCOMs could aid in some normalization of receivables of generator dues. Stocks such as NTPC, JSW Energy, TPREL and even Coal India (see Exhibit 3) could benefit with normalization of receivables.
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