Discom losses to balloon in FY21; debt at pre-UDAY levels, says ICRA

It is back to square one for power distribution companies (discoms) as the fall in demand for electricity due to the coronavirus-induced lockdown in the country has pushed debt overhang at pre-UDAY levels of 2015. This may also result in a sharp spike in discom losses for this year unless tariff reforms are urgently implemented, rating agency ICRA has said.

The expected poor financial performance this year is on the back of a 5-6 per cent decline in demand for electricity in FY21 against FY20. The earlier estimate for the decline was 1 per cent in April but it was dependent on the lockdown definitively ending across the country by the middle of May. The re-imposition of lockdown by various states across the country in July that is expected to spill-over to next month as well has exacerbated the situation.

The rating agency said demand is now expected decline by 3.5 - 4.0 per cent in Q2 and Q3 of FY21 and only a marginal recovery of about 1.0 per cent in Q4 FY21, which would, in turn, suppress thermal plant load factor (PLF) to about 50-51 per cent in FY21 against the earlier estimate of 54 per cent. PLF in fiscal 2020 was 56 per cent.

All India electricity demand declined by 16.2 per cent in Q1 FY21 on a year-on-year (Y-o-Y) basis but recovered from a decline of 23.1 per cent in April to 10.9 per cent in June 2020 and further to 3.9 per cent in the first 15 days of July 2020. The recovery in July, however, was slower than earlier expectations.

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"The decline in energy demand has thus adversely impacted the revenues and cash collections for the power distribution utilities (discoms), especially given that the bulk of the consumption decline has come from the high tariff paying industrial and commercial consumers; and given the delays in cash collections from other consumer segments," said Sabyasachi Majumdar, Group Head & Senior Vice President - Corporate ratings, ICRA.

"The consequent revenue gap for the discoms at all India level is estimated to increase further to about Rs 42,000-45,000 crore in FY21 against our earlier estimate of Rs 20,000 crore. The recovery of this revenue gap, if allowed through regulatory asset (RA) by State Electricity Regulatory Commissions (SERCs) would require a tariff hike of 2.5 - 3.0 per cent at an all India level, assuming recovery of RA over a three-year period. As a result, timely implementation of such tariff hike by the respective state regulators for recovery of such revenue gap remains extremely critical for discoms," Majumdar said.

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The slow offtake of loans as part of the liquidity support announced under the government's stimulus package in May is another stumbling block. The support was to the tune of Rs 90,000 crore for the state power discoms, in the form of loans against receivables, from Power Financial Corporation (PFC) and Rural Electrification Corporation (REC). Outstanding dues for discoms to power generating companies are higher at Rs 1,17,000 crore as of May 2020.

"The overall debt on the books of state-owned discoms at an all India level as of March 2019 has crossed the pre-UDAY level and is now expected to further rise with the implementation of liquidity relief scheme being availed through long tenure debt funding from PFC & REC, mainly to meet the overdues as on March 2020, as well as the possibility of availing an incremental debt to fund the revenue gap estimated in FY2021," said Girishkumar Kadam, Sector Head & Vice President, ICRA Ratings.

The agency has also revised the audited book losses for discoms for FY19 to Rs 49,600 crore against the provisional estimate of Rs 28,000 crore reported earlier. The losses have also reached closer to the pre-UDAY level, as discoms were not able to raise the tariff for consumers.