Delhi power tariff hike a win-win for banks and power co

Delhi’s 24.15 percent electricity tariff hike effective from 1 July is not only a positive for power companies but also banks. And guess who is smiling the most? Nope not Reliance Power or the Tatas, but IDBI Bank because it is the largest lender to Delhi’s power distribution companies and was at risk of losing money because of their accumulated losses. The proposed tariff hike will boost the revenues of discoms and mitigate the risk for lenders to that extent.

Speaking to CNBC TV18, BK Batra, executive director at IDBI Bank noted that the tariff hike will improve the bank’s asset quality. “Since the cost of purchase and other costs are higher than the recovery through tariffs, they have been making losses which have been straining their liquidity quite badly,” Batra told CNBC-TV18.
Batra clarified that although the power distributors did not default or delay any payments to the bank, the problem cropped up because utilities weren’t able to pay NTPC and other generation companies for the power purchased. As the entire tariff is regulated by the state regulator, companies have almost no control over power purchase costs, which have gone up by 300 percent in the last 10 years.

Moreover even though the bank’s total exposure to the power sector is 15 percent of the total book value, the draft proposal that seeks to tweak lending norms for state utilities will have no impact on the earnings for the bank as its exposure to state electricity boards is nil.

Financial year 2012-2013 will be the year of big power tariff hikes which will allow state distribution companies to repair their balance sheets and recover some of their costs. “The most recent Delhi tariff hike will support valuations of Reliance Infrastructure,” Bank of America Merrill Lynch said in a note.

Low tariffs were leading distribution companies or discoms to face a loss of almost Rs 2 a unit which was leading to a loss of Rs 20 crore a day, Lalit Jalan, chief executive officer, Reliance Infra told CNBC-TV18.

He expects the hike in power tariffs to help pare losses that companies were facing in Delhi. In the last 10-years, Jalan said tariffs have been hike by over 36 percent. This trend of hiking prices definitely augurs well for the power sector and should give distribution companies regulated profits for the year.

Meanwhile shares of power generation and distribution companies moved higher after three Delhi-based private distribution companies – Tata Delhi Power, BSES Rajdhani and BSES Yamuna – hiked the price of power for domestic use by a steep 24.15 percent after getting the go-ahead from the Delhi Electricity Regulatory Commission. The price of power for commercial use was hiked by 19.5 percent.

Tata Power and Reliance Power both outperformed the BSE Sensex today as the Delhi business accounts for nearly 8 percent of consolidated net profit for Tata Power, while for Reliance Infra it accounts for a little less than 5 percent.
Source: First Post


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