Dues of private coal-based independent power producers (IPPs, or gencos) are expected to wind down to a four-year low of less than 100 days by end of this fiscal, and well below the pre-pandemic levels (see chart 2 in annexure), Crisil’s analysis of India’s 76 GW of operational IPP capacities indicates.

Liquidation of receivables from state power distribution companies (discoms) following the central government’s Aatmanirbhar stimulus¹, and better payment cycles on regular billings will drive the improvement. That, in turn, would support credit profiles.

In the first half of last fiscal, discom liquidity was severely impacted by lower collections because of pandemic-induced lockdowns. Consequently, dues to IPPs ballooned more than 50% by September, from the ~Rs 48,000 crore seen at the end of last fiscal. This had started affecting the debt servicing ability of gencos.

The Rs 1.35 lakh crore Aatmanirbhar stimulus announced in May 2020 to clear off the dues till June 2020, came in as a much needed support.

Under the stimulus, disbursements cumulating to ~Rs 1.05 lakh crore² are expected to be provided by the end of this fiscal, of which nearly 40-45% will be to clear dues of thermal IPPs (see Chart 1 in the Annexure). About Rs 30,000 crore has already been disbursed in previous fiscal which arrested the rise in receivables to an estimated ~125 days as of March 2021 (compared with ~117 days as of March 2020).

Says Manish Gupta, Senior Director, Crisil Ratings Ltd, “The balance disbursement under the Aatmanirbhar stimulus, expected in this fiscal, should help wipe-off most of the older genco bills. On the current bills too, the payment cycle has shortened by 2-3 months as the discoms own liquidity picked up in line with economic recovery. Payment security mechanisms through letters of credit is also helping in clearing IPP dues faster. Overall receivables are likely to reduce to less than 100 days, which would be the lowest in the past four fiscals.”

This factors in incremental delays of ~10 days by discoms, which may arise due to the second pandemic wave.

Says Ankit Hakhu, Director, Crisil Ratings Ltd, “This improvement should free up Rs 7,000-9,000 crore in fiscal 2022, equivalent to one quarter of debt servicing for these IPPs. We expect the money to be used for paring down debt or creating liquidity buffers³ and/or undertaking necessary capex for adherence to emission norms, lending some support to credit profiles.”

That said, sustenance of payment cycles would largely be contingent on discoms being able to pay their dues regularly, which in turn, will depend on their own financial health. To ensure that, implementation of structural reforms such as timely release of subsidies and operational improvements through installation of smart meters is a requisite. Our estimates will be sensitive to these developments.

¹ The Aatmanirbhar stimulus offers discoms to pay for their outstanding dues to gencos through loans from PFC/REC.
² Reason for lower disbursement: The stimulus is subject to states providing guarantee and committing towards operational improvements of discoms through smart metering, release of subsidies, etc. A few discoms are borrowing from market as well.
³ through creation of debt service reserves or lowering working capital utilisation