The cumulative recovery rate for stressed operational thermal power plants (TPPs) for asset reconstruction companies (ARCs) is expected to improve by 700-900 bps on-year to 83-85 per cent next fiscal, stated a report by CRISIL Ratings. The growth it added, will be driven by robust growth in power consumption on the back of adequate coal availability, timely payment by distribution companies (discoms) and expected healthy merchant power prices. These industry tailwinds are not only supporting faster resolutions but may also aid resolution of approximately 5 GW of stressed TPPs over next 2 fiscals.
CRISIL Ratings analysed security receipts (SRs) for stressed operational TPPs with principal debt of around Rs 18,000 crore across approximately 4 GW (around 50 per cent of operational TPP capacity with ARCs), to reach the conclusions.
Power consumption is expected to rise 6-7 per cent this fiscal, driven by a surge in demand from the commercial and industrial (C&I) segments, and growing urbanisation. In this milieu, thermal power generation companies (gencos) are likely to capitalise on the opportunity by improving their plant load factor (PLF).
Further, the report stated that the improved coal availability for TPPs by 8.8 per cent last fiscal due to government initiatives, led to healthy inventories with the TPPs. This trend, the report added, is expected to sustain with a ramp-up in coal production and improved evacuation infrastructure. More availability and also the healthy offtake by discoms and ising merchant sales are improving PLF for the SR pool of stressed TPPs rated by CRISIL Ratings to a healthy 70 per cent this fiscal compared with 66 per cent in fiscal 2023. This is driving improvement in ARC recoveries through faster debt aggregation and quicker restructuring or refinancing, he report said.
“The trend is likely to continue. Operating performance and cash flows of stressed operational TPPs will strengthen this fiscal. Additionally, timely realisations from discoms will also improve the liquidity position. The receivables position of thermal plants rated by us has already improved to 185 days as on March 31, 2024, from 200 days a year earlier,” said Mohit Makhija, Senior Director, CRISIL Ratings.
With improving operating performance, the debt to Ebitda ratio of stressed capacities is expected to improve to less than 6 times this fiscal from 10 times in fiscal 2023. This has not only spurred better recovery rates for the TPPs but is also paving way for enhanced investors’ interest for stressed TPPs.
CRISIL said that as much as 5 GW of thermal capacity with more than Rs 50,000 crore debt from secured creditors awaits resolution under the Insolvency and Bankruptcy Code. These capacities experienced stress during 2018-2019 owing to a multitude of factors such as over-leverage, implementation delays and lack of power purchase agreements (PPAs).
Despite the stress factors, these capacities offer opportunities for acquisition with potential upside as approximately 55 per cent of the 5 GW capacity can be operationalized with fresh capital investment, while around 45 per cet already are with PPAs tied up. Plus, there is scope for addition of about 3 GW to the existing capacity where requisite approvals and groundwork necessary to scale up are already in place.
Sushant Sarode, Director, CRISIL Ratings, said, “Investors looking for the resolution of stressed TPPs will benefit as power supply addition will be faster compared with setting up greenfield projects over the medium term. Hence, large companies in this sector may look to invest in these assets, as also seen in strategic buyouts of 11 GW stressed capacities in past three fiscals. The key for quicker resolution will however, lies in sizing down the stressed debt to the right sustainable levels acceptable to both lenders and investors.”
The continuation of fuel supply and discom payment policies, and pace of stressed asset resolution will remain the key monitorable, CIRISL said.