Yet another bitter pill for India Inc?

Tue, 25 Jun Pre-Open

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Taking a very broad view at the Indian power sector suggests only one thing. A vast opportunity! Facts like India's per capita power consumption being way below the world average strengthen the notion. So does the country's substantial power demand-supply mismatch. All positive signs for top to bottom approached investors.

But then, when one dives into the details, it paints a different picture. The sector is a highly regulated, and one that faces various issues time and again. These relate to fuel supplies; defaulting debtors; capacity expansion related risks, amongst others.

However, with the Union Cabinet allowing power forms to pass on prices of imported coal, it seems to have mitigated certain risks. Power companies have not been working at optimal levels due to inadequate fuel supplies. And with the same, the viability of the newly set up projects have gone for a toss. And due to the same, many new projects have been stalled or deferred. But with the companies now allowed to pass on the higher costs of imported coal, they would be able to improve their utilisation levels and ergo, project viability. This move by the government is definitely a shot in the arm for the sector.

While the effective price hikes would be difficult to calculate, the assumption making rounds seem to suggest a 15 to 20 paise hike in per unit costs. As per the Finance Minster, there seemed to be no other choice. The call was between no power or more expensive power.

With prices increasing, we cannot help but wonder whether it would be easy for one to absorb these. Power generation companies sell power to the state electricity boards (SEBs/discoms). As such, it will be them who will have to take the efforts to pass on costs. And with discoms buying power at higher costs, they would have to improvise on their collection efforts if they do not want to worsen their financial conditions. While the government had bailed out the discom a while ago, in return, they were asked to get their act together and improve their efficiency overall. As such, one would expect price hikes from their side as well. However, with the elections lined up for the next year, it would be interesting to see the outcome of this development. Further, the final consumers i.e. households and industrial customers would also have to face the brunt of this decision. These segments would feel the pinch in the form of higher costs - direct and indirect (in the form of higher inflation). For India Inc, that is already reeling under the burden of slower growth and thinner margins, the addition power cost pressure may be yet another bitter pill to swallow.