Is the worst behind India's power sector? - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Is the worst behind India's power sector?

Jul 3, 2015

India has made a reasonable progress in adding power generation capacities. As cited by the power minister the installed capacity for power generation increased 8.4% in the last year. Previously the power plant units used to remain idle due to scarcity in the supply of coal. This constraint was eased by the government through auctioning of coal mines. The assurance of coal linkages has brought life back to the power generation units. However the worst is hardly behind the sector as it continues to deal with demand supply gap and distribution losses.

Demand Scarcity

Due to low demand for power, India's average plant load factor (PLF) has dropped to a 15 year low at 65.1%. The new Central Electricity Regulatory Commission (CERC) norms provides incentives to the generation and distribution companies based on their PLF. Lower PLF will lead to lower incentives and will have an impact on the net profits of the companies in the sector.

Distribution losses

State Electricity Board (SEB) is involved in the distribution of power. They procure power from the power generation companies and distribute it to the consumers. They have accumulated losses of Rs 2500bn and lose Rs 700bn every year as per the first year report card of National Democratic Alliance (NDA) government. The SEB's do not have enough resources with them to enter into Power Purchase Agreement (PPA) with the power generation company. They have been partially responsible for the weak demand prevailing in the power sector. The past 24 months have seen no power purchase agreement, due to the poor financial health of the distribution companies. Moreover the distribution arm of SEBs, succumb to the political pressure and are not able to conduct tariff revisions.

There are huge Aggregate Technical & Commercial (AT&C) losses posted by distribution companies due to outright theft, unmetered supply to the farmers and lack of technological upgradation. As per Central Electricity Authority (CEA) report, theft alone causes loss of about RS 200bn annually.

The way ahead

Certain ways to curtail losses would be to open the power distribution sector to private sector and have free market competition. Radical reforms would be required to revive the state run SEBs and the power sector at large.

Power financing companies like PFC and REC will also have to sustain the quality of their assets to be able to fund long term generation projects.

Meanwhile investors need to ensure that their selection of stocks, in a ROE regulated sector like power, is based on not just the companies' growth prospects but also profitability.


Equitymaster requests your view! Post a comment on "Is the worst behind India's power sector?". Click here!

  

More Views on News

POWER GRID Share Price Up by 5%; BSE POWER Index Up 2.6% (Market Updates)

Oct 21, 2020 | Updated on Oct 21, 2020

POWER GRID share price is trading up by 5% and its current market price is Rs 166. The BSE POWER is up by 2.6%. The top gainers in the BSE POWER Index is POWER GRID (up 5.3%).

More Views on News

Most Popular

My Latest Stock Recommendation (Fast Profits Daily)

Oct 9, 2020

How I picked an exciting stock using trends from both the commodity and equity markets.

The 'Seedhi Baat, No Bakwaas' View on ITC (Profit Hunter)

Oct 12, 2020

Is ITC an investment or a speculation at current levels?

One of the Best Investment Opportunities in the Market Right Now (Fast Profits Daily)

Oct 16, 2020

The one sector that you should be looking at to make good profits.

The Inflection Point for Defence Stocks is Getting Closer (Profit Hunter)

Oct 9, 2020

Few Indian defence companies could use their engineering capabilities to eventually become global leaders.

More

Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE POWER


Oct 21, 2020 (Close)

S&P BSE POWER 5-YR ANALYSIS

COMPARE COMPANY

MARKET STATS