Shrinking RE Receivables

Leading renewable energy (RE) companies are set to see their receivables reduce to ~140 days as of March 2023 from ~180 days a year ago — a level last seen before the Covid-19 pandemic began.

Two-thirds of this decline will be because of increasing central counterparty offtake, and the rest due to state discoms implementing the Late Payment Surcharge (LPS) scheme (see chart in annexure).

This is based on an assessment of 10 leading RE companies in the CRISIL Ratings portfolio, which are expected to build 50-55% of the renewable energy capacity in India in the next 2-3 fiscals.

In March 2022, leading RE companies had receivables of about six months, similar to that in March 2019 level. While direct receivables from state discoms stretched, sustenance in overall receivables days was largely on account of increase in the proportion of central counterparties (Solar Energy Corporation of India and National Thermal Power Corporation Ltd, which clear payments within 30 days of due date) to ~40% of operational portfolio in March 2022 from ~20% in March 2019.

This fiscal, we expect the share of central counterparties in operating RE capacities to rise to ~50%, which will improve receivables by ~25 days by March 2023, other things remaining constant. The calculations remain contingent on likely commissioning of ~7 gigawatt by RE companies with central counterparties during fiscal 2023.

Central counterparties are likely to maintain their payment track record, given the benefit of diversity, payment security funds, higher bargaining power because of their scale, and flexibilities arising from being a beneficiary in tripartite agreements between the state government, the Centre and the Reserve Bank of India.

Coming to direct receivables from state discoms, payment cycles here have not improved in the past two fiscals as discoms of Madhya Pradesh, Maharashtra, Telangana and Andhra Pradesh (accounting for ~30% of the overall capacity exposure as of March 2022) held back payments because of liquidity crunch or contractual disagreements.

In fact, among state discoms which were leading RE off-takers, a majority had substantial payment delays in the past two fiscals (as represented by states in red and amber in the map below).

Half of total capacity exposed to substantial delays in payments by state discoms
 

Besides the delays, the payment profile of state discoms has been variable and unpredictable (as seen in the annexure). This leads to additional working capital costs and creates cash flow management issues for RE companies, which have managed debt servicing so far by resorting to liquidity buffers and working capital. However, the associated capital cost depresses equity returns.

The LPS scheme should help improve receivables from state discoms. Under the scheme, Power Finance Corporation/REC Ltd will provide loans to state discoms to help pay off dues to gencos (over 1-4 years). Andhra Pradesh , Madhya Pradesh, Karnataka and Maharashtra have subscribed to the scheme and are set to clear past dues to power generating companies and regularise fresh dues.

Government of India has been providing similar support mechanisms in the past however what’s different this time is the presence of penal provisions in the LPS scheme, such as cessation of short-term power access, curtailment of medium and long-term power access, and additional liabilities for delay in payments, or if generators dip into payment security funds. This brings in more confidence on regularisation of state discom dues.

We believe that the LPS scheme may potentially clear dues of ~Rs 2,000 crore in fiscal 2023 for the companies studied and improve the receivables of key RE companies by another 15 days.

This will also help improve investor sentiment in the sector who take confidence on payments from counterparties as per terms of power purchase agreements, albeit with some delays. Moreover, some of the assessed companies have started receiving payments and communication on scheme implementation from select state discoms.

Traction on LPS scheme holds significance as payment delays continues to remain one of the key risks for RE sector. Although time and again, steps have been taken by Government authorities to alleviate stress. Such as Rs 1.2 lakh crore loan scheme earlier under Atmanirbhar Bharat to enable discoms to pay for outstanding dues to gencos, pre-covid. Till now, such schemes and arrangements so far have provided only temporary relief. A fundamental improvement in the financial and technical health of state discoms is imperative for long-term sustainable development of the RE sector.

Annexure

Receivable days and counterparty mix for leading renewable companies

 

- Manish Gupta, Senior Director, CRISIL Ratings Limited