Success of UDAY make or break deal for power sector, says Fitch

NEW DELHI: Ratings agency Fitch has maintained a stable outlook for all three major public sector power players – NTPC, PowerGrid and NHPC – after the government launched Project UDAY, a comprehensive package for power sector reforms, to deal with the problems haunting the industry.

India’s power sector, in general, and the power distribution companies (discoms), in particular, have been reeling under a debt burden of over Rs 4 lakh crore, which has put pressure on the books of public sector banks and threatens to mount their bad loan burden.

Fitch said while the outlook of the power utilities remains stable, the implementation of the reform measures is key to their ratings outlook in future.

Market watchers have greeted the reforms with exuberance but the focus has since shifted to the implementation of the package. In a report, Fitch said: “Successfully addressing the weak financial positions of state distribution companies (discoms) is key to improving the health of India’s power sector. The weak fiscal position of these entities has led to sustained delays in payment to market participants and weak offtake from power generators, in addition to increasing the risks associated with much-needed investment in the sector.”

The Cabinet on November 5 cleared an ambitious $7 billion debt recast and reform package to revive the loss-making state discom utilities. The Ujjwal Discom Assurance Yojana (UDAY) is seen by market watchers as a gamechanger. Under the scheme, states are being encourgaed to take over 75 per cent of the debt of the ailing state electricity boards, which will not be calculated as part of their fiscal deficit till 2016-17.

“States opting for the package and delivering on the loss reductions and efficiency improvements over the medium term remains essential for the success of the programme,” Fitch said. “The debt restructuring plan will substantially reduce discoms’ near-term debt burden; and more importantly, their high interest costs, which account for a large share of the discoms’ losses,” it said.

Fitch said a failure of the discom reforms would be negative for the entire power sector. Furthermore, any increase in receivable days for central utilities following the expiry of tri-partite agreements would be a negative for the financial profiles of these entities, it said.