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Powering ahead - Views on News from Equitymaster
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  • Jan 19, 1999

    Powering ahead

    Power cut in Bombay? No way! While the rest of India faces a power cut every now and then, Bombay is lucky to have continuous power supply. The credit for this goes to BSES - the licensee that supplies power to Bombay.

    BSES, incorporated in 1929, is one of India's premier utility engaged in the generation, transmission and distribution of electricity in and around Bombay. It also provides value-added services in electrical, contracting, engineering, procurement and construction (EPC) contracts and computer services. After functioning solely as a power distribution company, BSES became a power generator only in 1996 when it implemented a 500 MW, Rs 14 billion generation project in Dahanu (near Bombay). In financial year, 1999, BSES achieved a turnover of Rs 23.5 bn, 75 percent of which was contributed by the electricity business. It sold a total of 4,960 million units during the year at an average tariff of Rs 3.5 per kwh

    BSES' power-supplies division provides electricity to 1.8 million consumers. The company's customer base is skewed towards residential consumers (55 percent), giving it a huge competitive advantage. In fact, its retail distribution network is almost impossible to replicate even if the sector is liberalised. A higher proportion of retail users ensures lower defaults on payments and greater loyalty for services. Of the balance, 23 percent is accounted for by industrial consumers, 21 percent by commercial customers and 1 percent by others. Also customers in Bombay have higher purchasing power which helps the company to raise tariffs whenever necessary.

    Despite its monopoly status in a protected environment, BSES has not been seen resting on its laurels. Its constant endeavor to achieve optimum levels of efficiency and quality have resulted in a consistent decline in power distribution loss for the fifth successive year from 14.9 percent in 1993-94 to 11.5 percent currently - the lowest distribution loss in the country.

    The company is now making attempts to expand outside its Bombay-specific licence area. It is currently setting up a 169 MW plant in Kerala and a 200 MW plant in Andhra Pradesh on an IPP (Independent Power Purchase) basis. It recently bagged 3 distribution zones in Orissa. The profits of a licensee company like BSES are regulated and are dependent on the capital employed in the power business. Earlier, profits were linked to the bank rate prevalent on the first day of the fiscal year - 1 April. Profits of power companies were capped at 5% over and above the bank rate. In a falling interest rate environment this arrangement was disadvantageous to power companies. In April 1999, the power returns were de-linked from the bank rate. Power companies can now earn 16% of their capital base, irrespective of the bank rate. This rule applies only to power business in its licensed area and does not apply to independent power projects. As BSES has plans to continuously expand its capital base, this changed rule will benefit the company.

    The company's growth potential is intrinsically linked to new IPP projects. With its existing licensee operations generating free cash flow, BSES is ideally positioned to expand its generation capacity. As its return is based on capital base, BSES will need to continuously spend and increase its capital base in order to earn higher profits. The company has plans to spend nearly Rs 2 billion each year over the next three years to improve its distribution network. However the main outlay will be on its Palghar project (495 MW costing Rs 17.5 billion). This project has been stalled for the past four years pending government approval. BSES has been maintaining a cash surplus of over Rs 4.5 billion in cash and liquid investments so than it can immediately start construction once approval for the project is granted.

    Though the company will see no competition in its licence area, Tata Electric Companies (TEC) has been trying to lure away BSES' high-value industrial /commercial consumers, which may force it to reduce tariffs to remain competitive.

    In any case, this company is not looking back. In addition to the various power projects that it is implementing, BSES has firmed up plans to enter the telecom sector. Although synergies do exist between the businesses, the new venture is a cause for concern mainly because it involves a diversification from its core business of power generation and distribution.



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