FREE

Sector update: Power Utilities; Stressed Assets – The beginning of the end

Stressed power assets in India have reached ‘the last leg of resolution, driven by Central Bank’s attempt to clean up banks’ balance sheets. Although several power plants are operational, there is no regular servicing of debt on numerous assets (mostly owned by private developers). Based on our analysis, we estimate 60GW of power assets are under severe stress, led by one or various combinations of factors such as a) lack of PPA b) lack of fuel c) muted growth in demand d) excess supply, led by easy leverage and favourable policy concoction from 2003-2012, and e) developers’ stretched financials that have compounded the problem. With a huge supply of power assets on the block and an unfavourable demand-supply situation at present, we expect on average 30-40% write off on operating assets with all ends tied up, 50-60% write off for power plants with coal assurances from Coal India Ltd (CIL) and limited appetite for power plants with no Power Purchase Agreements (PPA) and tied up in uneconomical coal arrangements (power plants tied up in captive coal block with burdensome bids). As a result, the stressed assets market is clearly in favour of players with reasonably strong balance sheets as can be seen in the case of Tata Power, which has emerged as L1 bidder for Prayagraj asset (Rs35-40m/MW).

60GW under severe stress:  While parliamentary committee pegs stressed assets at 65-70GW, we estimate the same at 60GW. Note that various estimates peg the capacity under stress differently, based on their risk assessments. Our estimates exclude power plants wholly-owned by public sector utilities, with the total bad loan plaguing the sector at Rs2.5trn. Of the 60 stressed assets analysed, 45 are fully/partly operational and 15 are under construction. A few of the assets that have full tie up of fuel and power supply are easier to revive, as these assets need hair cut on debt/debt restructuring/write offs, while others need a fresh dose of capital infusion to be revived (especially under-construction power plants). We provide asset-wise details (with lender details) in the following pages.

Final leg of resolution: In Feb 2018, Reserve Bank of India (RBI) came up with a notification that mandated all existing debt frame work to be replaced with simplified stringent framework. This simplified scheme was brought in after failure of earlier schemes. Under the new framework, all assets facing defaults are expected to be resolved through a resolution plan (RP) and bought through insolvency in the worst-case scenario. Lenders in consultation with RBI are looking to clean up their balance sheets on the back of Samadhan Scheme, Parivartan Scheme and Sashakt framework. Note that lenders have already approved the inter creditor agreement under Sashakt. The deadlines for resolution will depend on the final court judgements and RBI’s decision. The Supreme Court has put an interim stay on the RBI circular and has asked lenders and companies to maintain status quo until the next hearing.

Expect significant discount to replacement cost: The asset price will depend on specific characteristics a) status of PPAs b) status of coal tie ups c) distance of power plant from coal d) legal issues e) state of power plants (amount needed to build or revive the plant). Given the amount of stress, we expect muted demand for power plants – a) Rs40-45m/MW with PPA and fuel linkage b) Rs30m/MW for an operational power plant with coal linkage c) Rs20m-25m/MW for operational power plant with no coal linkage and no PPAs d) liquidation of all the gas-based and under construction power plants.

The ball is finally rolling: Tata Power announced recently that its PE platform, Resurgent Power (26% held by Tata Power and the balance by PE Investors), has been issued a letter of intent from lenders for acquisition of 75% stake in the company. As per media reports, the deal is valued at an EV of Rs86-88bn, i.e, Rs43m/MW. Recently, Vedanta also announced that it has emerged as H1 bidder (the deal has been rescinded, as the lender found the bid to be at the lower end).

View and valuation

Insolvency and bankruptcy code (IBC), along with RBI circular should aid in the resolution/accelerated sale of stressed power assets, in our view. The pace will, however, depend on directions given by the High Court/national company law tribunal (NCLT) and RBI. Total assets of ~60GW are likely to see a resolution/change in management. We believe the distressed asset market is tilted in favour of buyers, given the significant number of power plants facing issues. The situation presents immense opportunity for companies with strong balance sheets - NTPC, JSW Energy, Tata Power, Torrent Power, a host of asset resolution companies and private equity players. We expect the power plant inventory from these assets to get absorbed over the next 3-4 years, given the extant demand-supply situation in India.