Power mergers

Why it could be like throwing good money after badimage1 (1)

The chart above paints a very piquant picture of banking NPAs in India as of March 2017. The chart highlights the sectoral mix of the current gross NPAs of the banking system and the distribution of the watch list of banks. Ironically, the biggest watch-list sector is the power sector with a 43% market share. It is in this light that the proposal of the government to merge stressed power assets into NTPC, REC and PFC should be looked at

It’s already under stress

While NTPC is more of a stable power business, REC and PFC are into the business of power financing. In both these companies we have seen a sharp rise in NPAs in the last 1 year as private power companies are finding it very hard to meet their power dues. With SEBs consistently repudiating the power purchase agreements (PPAs), we are likely to see a sharp rise in NPAs of the power sector in coming months.

Good money after bad

Most private companies are not in a position to service their debt. The PPA repudiation by states and higher prices of Indonesian coal is already taking its toll. Adding stressed assets to the books of NTPC, PFC and REC will only force them to borrow more and make their balance sheets more fragile. Effectively, these forced mergers will be like throwing good money after bad!

NCLT may not work in power

The good news is that NCLT approach of hiving off the assets appears to be working in case of steel. The bad news is that it may not work in case of power. Nobody wants to buy power plants that are based on shaky PPAs and where pricing is actually not remunerative. Also, the shift towards alternates is getting accentuated! Forced mergers may be the only answer for now but that is not a good answer! ©

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