Yes so the media, government, companies…everyone is going gaga over this power sector (yet again) discom debt restructuring plan announced last night…
I was having a chat with a regional financials client and the client said this… *“You will be surprised...So much similarities between Indian PSU banks and Chinese banks….Chinese bank just did a local govt debt restructuring….interesting…*If that’s the case we all know how well Chinese bank stocks have done over the years! Before I go onto my views over this…First on what the plan is about…For those who are interested in bank-wise SEB exposures, total power sector loans given by various players and other such data you can have a look at the attached report (older one) *So first thing – what exactly is Mission Uday?* The states will take over 75% of outstanding SEB loans by FY17E and issue non-SLR, state-backed bonds. These loans/ bonds will bear an interest rate of banks’ base rate+0.1%, which will bring down the interest cost of SEBs from ~13% currently to ~9.5%. In addition, beginning FY21, states will be required to fund 50% of the losses of SEBs. In addition, the package indicates broad long-term initiatives to reduce AT&C losses and reduce cost of power. *What about fiscal position of states?* The package indicates that the central government will not include the debt taken over by states under its calculation of fiscal deficit of respective states for 2 years i.e. FY16 and FY17. And the package indicates that this should not impact borrowing costs for states, since most rating agencies view SEB debt as a contingent liability of state governments. The restructuring package is OPTIONAL for states, though states opting for it and implementing successfully are eligible for higher funding in central government flagship programmes on increasing power availability in the country. *Ok so what’s our view?* So before going onto the near term impact on banks, PFC, REC etc. let us understand one thing… Whether loans are there on the balance sheet of SEBs or on the balance sheets of states, the ultimate onus of servicing was always on the states…if that wasn’t the case, SEBs would have been shown as NPLs on the books of banks which haven’t happened…So merely transferring debt is just an accounting entry in our view… Now the bulls argue that the biggest problem with SEBs which resulted in them not being able to buy power was the carrying cost of existing losses on the balance sheet and now that gets transferred to the State and it is the State’s headache…So SEBs if going ahead maintain some discipline, they can now buy power easily and it is very good for power demand, power sector etc… Look I agree there….so at the margin you can see some recovery in the power sector…Point here is that at the end of the day eventually the financial system will bear the cost directly or indirectly if States don’t hike tariffs , bring down losses and offcourse professionalise the board of SEBs…Unless that happens we are again back to the same place from where we started…There is no rule written some where that States wont default…if the State doesn’t adhere to the principles we will again be staring at an ugly situation three years down the line…Again the bulls argue that once it goes on the State’s balance sheet, States don’t even need to hike tariffs much which is a politically sensitive issue as long as they can manage the fiscal deficit some how…Industry is already paying a very high price for power (Some companies are quoting Rs7 per unit)…so that high a price, if the Government decided not to hike tariffs for say agri consumers, then how much can industry bare? Net net point here is that before getting carried away by this, the three basic things required is 1) Professionalization of SEBs so that they are devoid of any political interference, they publish regular accounts etc 2) Disciplined tariff hikes 3) Bringing down transmission losses… *What happens if the States accept this programme and three years down the line doesn’t adhere to any fiscal discipline and targets? What happens at that time?* At that time apparently the total outlay of 7bn USD by the Central Government under DDUGJY (Deendhayal Upaddhyaya Grameen Yojna), the states will not be eligible to receive it…Plus apparently the power minister was also talking that if they breach the targets, the Central Government’s allocation from their budget to those respective states will reduce… *Now impact on banks, PFC, REC* Please spare a thought to the minority shareholders of PFC, REC – I always said that at the end of the day, the banks and institutions like these PFC REC etc will be made scapegoats to serve the larger interest of the nation… So if say the loans are going to be replaced by bonds with interest rate of base rate + 0.1% cap, then say PFC which has a loan yield of 12.4% and a spread of 3.7%...if that spread plummets to 80bps on transmission and distribution side (because yield will now be say 9.5%), profits and ROE will halve Now earlier there were concerns on the book of these guys…*So say if NIMs go down but then people get confident on the books because of this transfer, the stocks have found a bottom?* Good question as asked by a client of mine…May be on 85% of the book one can be confident (again assuming that States wont default…) but what about 15% of the book which is private sector and 100% of net-worth for these guys? *What does it mean for banks?* Banks sacrifice the margins on their exposures to SEBs significantly, as these loans get repriced from~ 13% to base rate+0.1% (9.5%). The package remains mum on the NPV loss made by banks on this repricing/restructuring. In effect, PSU banks are again being made to bear the brunt of fiscal profligacy…PSU banks on an average have 4% of their book exposed to SEBs…so on 4% if there is 350bps interest loss, impact on NIMs will be ~15bps roughly But at the same time there will be some capital release as these state government backed bonds carry lower risk-weights… -- Kindly email stock reports at STOCKRESEARCHER@googlegroups.com For sharing knowledge -- NIFTYVIEWS.COM NOW A FREE OPEN SOURCE WEBSITE. http://www.niftyviews.com/ Disclaimer :- "The opinions expressed by the members on this board are based on their individual experience and perceptions and to share information with other members with the best of intentions to help fellow members in investment decisions as equity investment is a risky venture.The administrator of www.Niftyviews.com just provide a platform for the authors to express their opinion and take no guarantee for the genuineness of the same."ANY member of this forum doesnt prepare or publish any research report; or ii. provide research report; or iii. make 'buy/sell/hold' recommendation; or iv. give price target; --- You received this message because you are subscribed to the Google Groups "Niftyviews.com" group. 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