The soaring receivables from Telangana and Andhra Pradesh distribution companies (discoms) have not only weakened the internal liquidity of many projects but also necessitated a reduction in their debt service reserve accounts (DSRAs) or support from sponsors, according to India Ratings and Research (Ind-Ra).

This is the first of series of opinions of Ind-Ra on the renewable sector. The next two opinions will focus on the obligor-co-obligor structures and the evolving power purchase agreements for renewable projects.

Fallen Angels:
Projects with resourceful sponsors and adequate internal liquidity are likely to withstand the emanating stress and ride over this difficult period. However, projects with partially or fully depleted DSRAs would face a rating action. Therefore, the importance of adequate internal liquidity is coming to the fore again. In 2016, the state power utilities of Telangana and Andhra Pradesh paid ahead of time and availed rebates. In view of the surge in receivables now and other underlying issues such as tariff non-revision, the power utilities of these states have become fallen angles.

Deceptive Historical Receivable Profile
: The challenges to projects increase in the absence of an approved working capital line. Working capital debt provides projects liquidity cushion, helping in deferring the liquidity strain. Nonetheless, a working capital line is also debt. Power generation of Ind-Ra-rated projects have remained in line with expectations. In the event of a deficient power generation, challenges could increase and subsequently affected project debt serviceability.


Although project developers acknowledge that counterparty delays are common, increasing instances and prolonged period of non-payment cause serious concerns. Ind-Ra’s receivable tracker data indicate that if discoms derail from the established payment profile, the recovery to the earlier position takes a longer time or, in certain cases, never rebounds to the previous level. In some cases, recovery/reversal happens, albeit momentarily. In addition, the evaluation of receivables stickiness at that level is fraught with risks. Ind-Ra would expect a longer demonstration of a consistent payable track record before providing the benefit of timeline payments from counterparties in its analysis.


In Ind-Ra’s experience, counterparties such as NTPC Limited (
‘IND AAA’/Stable), NTPC Vidyut Vyapar Nigam Limited and Gujarat discoms continue to pay within the 30-day period. Also, NTPC and NTPC Vidyut Vyapar Nigam endeavour to establish letters of credit as delineated in power purchase agreements. Solar Energy Corporation of India has slipped from its earlier payable bucket of within 60 days to 75 days at end-March 2019. Although the slip by Solar Energy Corporation of India is not a major concern, it does not allay fears of further delays.

Working Capital Woes; Liquidity Offers Cushion
: In general, some developers believe that the maintenance of additional liquidity above the stipulated one quarter of DSRA (in most cases) is a negative carry. However, should the receivable profile sharply change or power generation dip, the liquidity is the first line of defence. Against the backdrop of dented sentiment, availing working capital lines is turning out be a challenge for projects. Ind-Ra’s rating experience suggests there is no easy solution to the current quandary of projects based in Telangana and Andhra Pradesh. Nevertheless, the agency considers additional/adequate liquidity and approved working capital line ahead of time essential for projects.

Structural Weaknesses Weigh on Credit Profile:
State-support becomes critical when discoms report high losses and leverage, and fail to revise tariff at crucial junctures. Meanwhile, the availability of timely data, including financial statements, is a major constraint to the pick-up of distress signals. Therefore, any change in the receivable profile, either contraction or elevation, is one of the parameters that reflects the state of a discom’s credit profile.

Southern Power Distribution Company of Andhra Pradesh Limited (APSPDCL) and Eastern Power Distribution Company of Andhra Pradesh Limited (APEPDCL) have not sought any tariff hike for FY20. The tariff for FY20 is without a hike and has been approved by Andhra Pradesh Electricity Regulatory Commission. FY20 is the second successive year without any tariff hike. The increasing dependence on subsidy has rendered Andhra Pradesh discoms vulnerable to the finances of the state. A significant part of the subsidy for FY19 was supposed to be raised through bonds guaranteed by the government of Andhra Pradesh and was raised on 23 April 2019. It is likely that a large quantum of pending dues to generation companies, including renewable projects, will be cleared from the proceeds of these bonds. However, lack of clarity about timely funding of subsidy continues to pose uncertainty over the cash flow position of the discoms in Andhra Pradesh, as well as of projects that sell power to the discoms in state.

Telangana discoms have not filed for tariff petition for FY20. Telangana discoms had no tariff hike in FY19 and had a tariff gap of INR59.40 billion in FY19. The gap was 20% of the total approved revenue for Northern Power Distribution Company of Telangana Limited (TSNPDCL) and Southern Power Distribution Company of Telangana Limited (TSSPDCL). The government of Telangana had provisioned for 84% of the FY19 tariff gap, as on the date of the FY19 tariff order. The dependence of the discoms in Andhra Pradesh and Telangana on state support is significantly increasing year-on-year. This trend is a significant credit concern, considering delayed payments to the discoms could lead to a huge cash flow gap for the discoms.


On 30 January 2019, NTPC notified that the pending dues (outstanding beyond 60 days) from the power utilities in Andhra Pradesh and Telangana were INR22.2 billion and INR13.6 billion, respectively. Payments pending to NTPC also indicate cash flow stress.

Certainty to Bring Clarity:
Although credit period is mentioned in power sale agreements, there is no certainty about payments at the end of the credit period. If there is certainty that a utility would make payment at the end of the credit period or on an identified date, it would enable the creation of an active bill discounting market. For instance, according to a state utility, receivables would be paid only semi-annually: June and December. This clarity would ensure that developers will discount bills with a financial institution or perhaps consider such payment pattern while bidding for new projects.

Given the need for projects to move to capital markets from medium-term bank loans, state governments and discoms must take a balanced step to ensure profitable operations and implement consistent, sustainable policies for managing discoms. Inaction would prevent from the fledgling renewable market from progressing and would potentially increase power cost for utilities while projects remain hostage to state utilities.

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Applicable Criteria

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Analyst Names

  • Siva Subramanian

    Director
    India Ratings and Research Pvt Ltd 4th Floor, D South, TIDEL Park No 4, Rajiv Gandhi Salai, Taramani Chennai 600 113
    +91 44 43401704

    Divya Charen C

    Senior Analyst
    +91 44 43401710

    Swarna Bagavathy

    Senior Research Associate

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    Namita Sharma

    Manager – Corporate Communication
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