Impact of government cash inflow in power sector, and its impact on Tata Power

Problem Faced by Power Sector

India's power distribution sector is passing through a turbulent phase on the back of large accumulated dues to be paid to generators, liquidity issues due to restricted cash flow, uncertain revenue due to closure of industrial and commercial operations and the prevailing low power demand in the sector in the wake of the ongoing lockdown due to the coronavirus outbreak.
According to data sourced from the PRAAPTI portal, the discoms(Distribution Companies) owe Rs 92,602 crore to the gencos(Generation Companies) as of February, 2020

Now measures announced by government,

Rs 90,000 crore Liquidity Injection for DISCOMs

Power Finance Corporation and Rural Electrification Corporation will infuse liquidity in the DISCOMS to the extent of Rs 90000 crores in two equal installments. This amount will be used by DISCOMS to pay their dues to Transmission and Generation companies. Further, CPSE GENCOs will give a rebate to DISCOMS on the condition that the same is passed on to the final consumers as a relief towards their fixed charges.

The companies that are in Power generation and power distribution are directly going to benefit from these measures furthermore,

The generating companies will be the biggest beneficiary of this liquidity package as it will clear the old dues of distribution companies to generation companies. This will improve the liquidity conditions for power generation companies which have been really hit hard by the bulging receivables. The governments are well aware of the severity of this issue on investor sentiments and that is the reason that the power ministry had clarified that distribution companies are required to pay for the power off taken within 45 days during this covid-19 period too.

How it will benefit Tata power?

Problems faced by tata power: -

Low Capacity Utilization: 

Installed capacity (345 GW) is twice of the peak demand (177 GW) resulting in low utilization  24 GW thermal assets stranded putting pressure on the banking system   While Energy demand has grown, it has not kept pace with growth in India  Economy  Capacity glut & weak SEB finances impacted thermal PLFs; FY18 saw initial signs of reversal of decline in PLF

Stress on financials of Discom not yet resolved:

UDAY impactful with shifting of losses & reduction of AT&C losses but ARR-ACS gap needs to be addressed Cross subsidy burden on Sharp increase in receivables stretching developers and lending system

Benefit from Economic package:-

Tata Power will be benefitted from both sides that are generation as well as distribution

1.)    Its power generation subsidy will get payment from distributors That will reduce some burden of debt, Company will have liquidity.

2.)    Distribution subsidy of tata power will get some relief loans from government in form of liquidity so that company will pay power off taken within 45 days.

3.)     As company is more in power generation rather than distribution it might benefit more.

Risk: - If cronavirus pandemic continuous or lockdown extends for some more time then power demand from industries will be affected that results in less profitability.