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Published on 19/10/2019 2:20:05 PM | Source: Motilal Oswal Ltd

Rajasthan DISCOMs: Government subsidy crucial - Motilal Oswal

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The Prevailing ‘Discom’fort

Rajasthan DISCOMs: Government subsidy crucial

* Rajasthan accounts for ~6% of the country’s electricity demand (fifth largest). The state is also home to an estimated 6.5m agricultural households (fourth largest), implying large exposure to this highly subsidized consumer category. In this report, we have consolidated and analyzed the financials of all three DISCOMs in Rajasthan (AVVNL, JVVNL and JdVVNL).

* ~40% of the DISCOM’s power is sold to agricultural consumers. Thus, dependence on government subsidy is huge and represents ~21% of the DISCOM’s total revenues.

* At an EBITDA level, losses have reduced ~30% from FY15 levels to INR74b in FY19 led by sharp tariff hikes for its industrial and domestic customers. This, though, could impact the offtake ability of such segments. Further, Rajasthan’s DISCOMS have proposed 11.8% tariff hike (across categories) for FY20. AT&C loss, while~625bp lower over FY15-19, remains high at ~25%.

* After cash loss of INR112b in FY16, DISCOM’s losses reduced to INR2b in FY17 and turned cash positive in FY18-19 led by UDAY grant of INR90b in FY17 and INR120b each in FY18 and FY19. Not accounting for any such grants, we expect cash losses for these DISCOMs in FY20, despite building in tariff hikes.

 

Tariff hikes aid growth: Rajasthan is a case study for high cross subsidization with Industrial tariffs rising from ~INR5.8/kWh in FY15 to ~INR8.0/kWh in FY19; domestic tariffs have increased from ~INR3.9/kWh in FY15 to ~INR5.1 in FY19. Agricultural tariffs, on the other hand, have increased from ~INR1.2/kWh in FY15 to just ~INR1.8/kWh in FY19. Such a large increase in industrial/domestic tariffs could impact the offtake ability of such segments. Furthermore, Rajasthan’s DISCOMS have proposed 11.8% tariff hike (across categories) for FY20. As far as volumes are concerned, Industrial volumes have risen at ~8% CAGR over FY15-19, whereas Domestic volumes and Agricultural volumes have increased at 4.1% and 5.4% CAGR, respectively, over the same period.

 

Power purchase cost under control: Power procurement costs, which constitutes ~85% of total expenses, has increased by INR0.49/kWh over FY15-19 (to INR4.53/kWh) while the average revenue realization has increased by INR1.42/kWh over FY15-19. This has improved the operational performance of DISCOMs.

 

AT&C losses reduce, but higher than all-India level: After UDAY, AT&C losses have reduced drastically from 31.2% in FY15 to 24.9% in FY19. Though the reduction is significant, the AT&C losses are high compared to all-India level (~18%) and UDAY’s target of 15%. Based on the tariff filings, AT&C losses are expected to reduce to ~21% in FY20, but we believe this looks difficult to achieve.

 

Heavily dependent on government subsidy: Total tariff subsidy represents estimated ~21% of total FY19 revenues (Note: For AVVNL, subsidy received numbers for FY19 are not available and are assumed at FY18 level). As highlighted earlier, the burden of higher tariff on industrial consumers could impact demand from this segment. In such a scenario, the volume mix may incrementally tilt further towards agricultural consumers, meaning that government subsidy will remain extremely critical. Rajasthan’s DISCOMs have received INR90b in FY17 and INR120b each in FY18 and FY19 under the UDAY Grant.

After innumerable attempts to reform the Electricity Distribution sector, it is perplexing to see that it remains in such a sorry state. Unless DISCOMs turn profitable, issues pertaining to delayed payment, curtailed demand and unwarranted litigations would continue and be a key overhang on the generation sector. DISCOMs are also in a circular loop due to their weak financial health, in our view. Weak DISCOMs suffer from higher power purchase costs (generators seek premium for risk), driving higher losses. They excessively burden their lucrative industrial/commercial consumers (in form of cross-subsidy burden). As a radical step, amongst others, if health of DISCOMs cannot be sustainably improved, then we believe that the industrial/commercial consumers should be unshackled from the grip of DISCOMs by giving them free access at market-linked rates. The importance of cheap and quality electricity for industries cannot be ignored. Radical measures are required for ‘The Prevailing Discomfort’ in the power sector to drive growth and investment. 

 

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