India to revive sick state power utilities

Approval of restructuring package would entail monetized debt, says Maybank Kim Eng.

Media reports suggest that the cabinet may soon consider approving restructuring of the Rs2tn debt of state‐owned power distribution companies.

Here's more from Maybank Kim Eng:

The package to bail out the financially sick state power utilities comprises 1) conversion of 50% of the debt burden into bonds to be issued by the respective state gov’ts, 2) restructuring of the balance 50% debt — the power distribution companies will be given a 3‐year moratorium period to repay the principal amount and will be provided interest rate cuts too.

Approval of such a package would be positive because debt would be monetized and some visibility would emerge on the huge uncertain debt. However, banks, especially state‐owned banks, would take a hit since they would have to restructure these loans. Nevertheless, we believe these initiatives would be positive for the power sector because they would remove the massive overhang on the sector.

Most state electricity boards have made upward tariff revisions in FY12 and more such revisions would be made in FY13, which would ensure that no further losses are made in future and these state‐owned power distribution companies would be able to buy costlier power instead of choosing power cuts owing to financial strain.