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Power Debt Revamp to Spur $6 Billion Expansion: Corporate India

Power Debt Revamp to Spur $6 Billion Expansion
Power lines hang over building tops in Mumbai. Losses at regional electricity distributors have widened in tandem with the difference in the cost of supply and the average tariff. Photographer: Prashanth Vishwanathan/Bloomberg

Neyveli Lignite Corp., India’s third-largest state-run power generator, expects a debt revamp plan for distributors will help recover dues and spur lenders to fund its 310 billion rupee ($6 billion) expansion.

A government decision last month to recast short-term loans of distribution companies and allow them to raise tariffs may help the states of Tamil Nadu and Rajasthan settle 40 billion rupees of unpaid bills with Neyveli Lignite, Finance Director Rakesh Kumar said in an interview. The states paid 3.7 billion rupees last week, he said.

“The plan to turn around distribution companies is a big step for every power generator in the country,” Kumar said by phone from the southern Indian town of Neyveli, where the company is based. “Without this, it would be difficult to proceed with our expansion plan.”

The lignite miner is seeking to triple capacity to 8,000 megawatts in eight years and boost profit growth as Prime Minister Manmohan Singh aims to spend 13.73 trillion rupees ($263 billion) in the next five years to reduce blackouts that hinder economic growth. The collection of dues from the two states is also crucial to revive a stalled share sale plan, India’s Coal secretary S.K. Srivastava said last week.

Shareholder Return

“Neyveli must expand revenue and profit to be able to boost shareholder returns,” said Vijaykumar Bupathy, an analyst with Spark Capital Advisors in the southern city of Chennai, who has an “add” rating for the shares. “Faster recovery of dues will help the company pursue its expansion more aggressively.”

The stock has gained 17 percent this year, compared with a 22 percent increase in the benchmark Sensitive Index. Rivals Lanco Infratech Ltd., Reliance Power Ltd. and GVK Power & Infrastructure Ltd. have outperformed the index. Neyveli gained 0.2 percent to 85.15 rupees at the close of trading today in Mumbai.

Neyveli’s inability to recover dues prompted the government last month to defer the plan to sell a 5 percent stake in the company, Srivastava said Oct. 3. The stake would be worth 7.1 billion rupees based on yesterday’s closing price.

“Once the dues are cleared, we will have a stronger case before the investors,” Srivastava said.

Neyveli reported a record profit of 14.1 billion rupees after boosting output 5 percent to 18.8 billion kilowatt hours in the year ended March 31.

Borrowing Plan

The company plans to raise 9.4 billion rupees in loans this month and has asked banks to submit bids by Oct. 15, Kumar said. Power-generation companies have struggled to raise funds for projects because of concerns they might not find buyers for all of their output and a fuel shortage may hamper operations.

Neyveli is counting on the government’s approval on Sept. 24 to allow state distributors to restructure at least $30.5 billion of debt, helping them clear their dues and boost electricity purchases. According to the plan, half of the short-term borrowings of the distributors will be taken over by the regional governments, while the rest will be reorganized by lenders. The utilities will be asked to seek regular tariff revisions and improve efficiency by curbing power thefts and upgrading machinery.

State utilities that adopt the debt recast plan will get transition funding from government lenders such as Power Finance Corp. and Rural Electrification Corp. Ltd., Kumar said. These funds will help the distributors, many of which have been denied loans by banks, keep the operations running and pay back dues to generation and fuel suppliers.

Utility Losses

Power Finance will lend 50 billion rupees to the Tamil Nadu distribution company, Power Finance Chairman Satnam Singh said in a phone interview. The loan will be disbursed in phases, as the distributor meets milestones in increasing tariff and reducing technical and commercial losses, he said.

Rural Electrification is also considering lending a similar amount, Finance Director Ajeet Agarwal said by phone.

Losses at regional electricity distributors have widened in tandem with the difference in the cost of supply and the average tariff. State utilities, forced to sell electricity below cost, had accumulated losses of 1.9 trillion rupees as of March 2011, almost 85 percent of which were funded through short-term debts, according to Power Secretary P. Uma Shankar.

“State distribution companies owe about $3 billion to power generators and that’s a lot of money,” said Amit Sinha, a New Delhi-based partner with Bain & Co. “If your customers are in bad shape and delaying payments, any investor will be very cautious in putting money in generation projects.”

Leakages, Theft

India loses 27 percent of its electricity through leakages and theft, while peak supply lags behind demand by an average 9 percent, according to the Central Electricity Authority.

NTPC Ltd., the country’s biggest power producer, cut generation by 13 billion kilowatt hours, or 6 percent of total production in the year ended March 31, as state government utilities reduced purchases, Chairman Arup Roy Choudhury said on Aug. 7. The company may have to cut output by another 13 billion kilowatt hours this fiscal year.

Neyveli’s stock is the cheapest among state-run power producers, with the price-to-earnings multiple lower than that of NTPC and hydro power producer NHPC Ltd. The government, which owns 93.56 percent in the company, must raise the public float to at least 10 percent to comply with capital market regulations.

“Neyveli is one of the worst-affected generators because of the financial distress of state distributors and a recovery of dues will be significantly positive for the company,” Spark Capital’s Bupathy said.

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