The power sector's woes have been going on for a while now. First it was the concern related to the distribution companies and their massive losses due to poor collection efforts, high debt on books as well as issues relating to power theft. Then came in the many problems surrounding fuel prices and supply.
All these factors (with many more) have led power producers to face operational problems. These issues have not only had an impact on the power sector - generation, distribution and transmission - but also to related companies that cater to the sector - including engineering and financing companies, as what has been witnessed in their financial performance and therefore the decline in stock prices of these companies in recent times.
Given the massive size of investments required to set up power plants, such projects are funded with a lot of debt; usually with a debt to equity ratio of 70:30. But with a bunch of projects facing issues related to fuel supply and costs, operating these plants and that too profitably has become difficult. With this, power producers are facing problems related to servicing their debts. As such, it is expected that private power producers now are likely to go in for debt restructuring. As per Business Standard, as much as Rs 500 bn worth of debt taken up for 15,000 megawatts worth of power projects could possibly become troubled loans.
If this is the case, it would be the second segment from the power sector to go in for large scale debt restructuring. The earlier being that of the distribution companies. The banks' exposure to such loans stood at Rs 1.9 trillion (the package was announced last year). The recent weakening of the rupee against the dollar makes matters even worse. Given Coal India's supply constraints, power producers are forced to import coal from abroad to operate their plants. But with imports becoming costlier - and power tariffs not easy to pass on given the reluctance of distribution companies - it makes matters all the more difficult for producers.
Not to mention the many power projects that are yet to be commissioned. As per the daily, banks have been asking power producers to go easy on the construction as loans repayments would be difficult for the power producers given the current environment. This would only lead to such loans turning bad which is a situation banks would want not want to happen.
What does this mean for the power producers? Just a remedy to curb the pain temporarily it seems. The fact remains that the situation is not likely to improve significantly unless and until the situations improve all across - starting with distribution companies and then leading to fuel supplies. However, this is not to say that the private power producers are not at fault here given the aggressive bids made by them few years ago.
Learning from this episode...
On a different note, we do believe that there is a good learning from this entire episode. The power sector was the darling of the market prior to 2008. But since then it has been amongst the top underperforming sector; along with real estate and other infrastructure related sectors. This brings us to the point of having a well diversified portfolio on an overall basis as well as within the exposure to the sector (stock wise). Overexposure to a particular sector or for that matter a particular stock can be harmful to one's portfolio.