BackFuel crisis may force power producers to restructure loans
Consolidated debt has been ballooning as there is no relief in cash flows due to power revenue generation
Premium(Pradeep Gaur/Mint)
Power producers in the private sector are caught in a quagmire. For some, loan restructuring seems imminent as pressure on cash flows mount on the one hand and fuel linkage issues continue to haunt them on the other.
Firms such as GMR Infrastructure Ltd, Lanco Infratech Ltd and Adani Power Ltd have projects close to completion. But, without adequate gas in the country to fire these plants, not only will they have low revenue generation, the profit and loss account will also suffer from huge interest costs, which are so far being capitalized through the construction period of these projects.
Some existing projects are already operating at below optimal capacity. For instance, Lanco’s Kondapalli Units I and II worked at poor plant load factors (PLF) of 50% and 28% due to a reduction in gas supply. GMR’s performance at Vemagiri paints a similar picture—PLF fell from 61% in September 2011 to 21% in September 2012. This holds true for some coal-fired power projects as well.
This undoubtedly has a bearing on financials. Consolidated debt even at the net level has been ballooning as there is no relief in cash flows due to power revenue generation. GMR’s debt-equity ratio has jumped from 2.4 at the end of September 2009 to 4.3 at the end of September 2012. GVK’s balance sheet saw its debt-equity ratio surge from 0.98 to 3.8. Other private producers are also in the same boat.
Further, low revenue translates into low operating profit. Given the backdrop of rising interest costs on borrowed funds, this in turn is reflected in poor interest cover ratio (operating profit/interest cost). The ratio has been falling steadily and is at a precarious less than 1 for most firms.
With no ray of hope yet on the fuel linkage issues despite a lot of promises made by the government, GMR, during the analysts’ conference call after the September 2012 results, stated that it is in the process of negotiating the restructuring of loans for its Vemagiri project expansion.
Restructuring implies a rollover of the term for principal repayment. Analysts say that some are even attempting to swap local debt for overseas loans, though this would entail some currency risk. Several other firms are also likely to travel this route.
Yet, restructuring loans is no permanent solution. A shot in the arm for the sector will only come from government action to end the policy logjam. Until that happens, the dismal state of these firms is unlikely to reverse, keeping investors from putting money in the sector.
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