Cash losses¹ of power distribution companies (discoms) will remain elevated at around Rs 46,000 crore this fiscal, or 40% higher than the Rs 33,000 crore seen in the pre-pandemic levels of fiscal 2020.

This is because revenues will remain constrained as demand from high-paying, commercial and industrial (C&I) consumers have been lower than seen during pre-pandemic period, while tariff hikes have been inadequate. Costs are also likely to surge primarily because of higher interest burden because of ballooning debt.

A study of 34 state discoms (from 15 states), which account for over 80% of India’s power demand, shows as much.

The nationwide lockdowns imposed in the first half of the last fiscal brought C&I activities to a standstill and evaporated an estimated quarter of demand from high paying C&I consumers for the full fiscal 2021 as compared to fiscal 2020.

Says Ankit Hakhu, Director, CRISIL Ratings, “In fiscal 2022, while industrial demand will recover with an expected recovery in industrial activity amid healthy GDP growth, forecast at 9.5% on-year, commercial demand will remain subdued as people remain cautious in stepping out of their homes. Consequently, we expect C&I consumers to account for a lower ~48% of demand in fiscal 2022, compared with 51% in fiscal 2020.”

Thus lower contribution of the C&I segment, which pays Rs 3-4 per unit more compared with agriculture and domestic consumers, will constrain overall realisations for the discoms. That, and tariff hikes by just 6 out of 15 state discoms analysed, would translate to a mere 1-2% increase in average realisations from fiscal 2020 levels.

Operating costs may also inch up ~3% over fiscal 2020 because of higher power purchase cost driven by pricier coal, transportation and steady increase in the administrative costs. Diesel prices are up over 35% from fiscal 2020 levels.

Says Aditya Jhaver, Director, CRISIL Ratings, “Further, denting the cash flows will be a more than 30% surge in interest cost as discoms take debt largely under Aatmanirbhar Bharat scheme², to repay older dues of generation and transmission companies. This is a higher cost debt with interest cost around 50-100 basis points higher than the average cost of debt of discoms. Debt will also be taken to fund ensuing cash losses and capital expenditure. We expect debt to surge to Rs 5.3 lakh crore this fiscal.”

Consequently, constrained realisations along with limited tariff hikes coupled with higher interest and operating costs is expected to expand discom losses yet again this fiscal – by a good 40% over fiscal 2020 levels (refer Annexure). This also means expansion of the operating gap³ from an estimated 56 paise in fiscal 2020 to 67 paise in fiscal 2022.

Government support in the form of subsidy inflows and prior period loss funding will provide some support to the discom cash flows, given that power distribution is critical for the state. However, given the past track record of delay in receiving subsidies, we don’t expect any substantial increase in support in the current fiscal.

Continuing cash losses are one of the main reason for the existing weak credit profiles of state discoms and make structural reforms critical to their sustainability. Our projections are sensitive to a third wave, further lockdowns, or slowdown in the pace of vaccinations. Timely support from states is also a monitorable.

¹ Cash losses are defined as PAT + depreciation, excluding revenue grants (non-cash grants provided for UDAY debt takeover) and regulatory income
² In fiscal 2021, the government announced Aatmanirbhar Bharat stimulus of Rs 1.35 lakh crore. The stimulus was in the form of debt made available to discoms from Power Finance Corporation and Rural Electrification Corporation to pay off dues of generating and transmission companies; we expect total disbursements of Rs 1.05 lakh crore under this package, out of which the analysed discoms are expected to receive Rs 0.93 lakh crore.
³ Per unit difference between average cost of supply and average revenue realised for discoms