India Ratings maintains stable outlook for power sector

Maintaining stable outlook for the power sector for the second half of the year, India Ratings today said that higher fuel costs and weak financial profiles of power distribution companies could pose major challenges to the sector. The agency expects the sector to get benefited from favourable tariff mechanism, comfortable liquidity and support from the central and state governments. However, it noted that recent rupee depreciation will affect the cash flows of the power plants with limited or no pass-through of energy and capacity charges as part of tariff. “Fuel costs and interest outgo will be higher for such independent power producers (IPPs) due to higher cost of imported coal and largely un-hedged foreign currency debt, respectively,” it said. Net financial leverage (net debt) could also increase due to higher debt and lower operating profits from higher fuel costs and sub-optimal plant load factors, the agency opined. “However, few power sector entities can pass-through complete fuel cost and foreign exchange rate variation and have low levels of debt to insulate their profiles,” it said. According to the agency, gas-based generation cost is likely to increase by 49 per cent to Rs 6.21 per unit due on account of the recent increase in domestic gas prices to USD 8.4 per mmbtu from USD 4.2, which will be applicable from April 2014.

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