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Monday, May 09, 2005

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Power producers: Winds of change impart volatility

Suresh Krishnamurthy

THE momentum seen in profit growth of power producers in 2003-04 has slackened. Changes such as the revamp of the legal framework, securitisation of dues and progress towards open access in distribution had contributed to the momentum leading to even an increase in investment interest in the sector.

For the financial year 2005, however, major power producers such as NTPC, Nuclear Power Corporation, Tata Power and Neyveli Lignite are set to report either a marginal rise, or a drop, in profits.

In the first nine months of the financial year, the larger producers have reported sluggish profit growth numbers. The sluggish trend follows strong growth of about 40 per cent reported by power producers in the year ended March 2004.

Again, the year prior to March 2004 did not turn out to be encouraging with profit growth settling at less than 5 per cent. Reliance Energy and some smaller companies such as CESC, Gujarat Industries Power and Torrent Power have, however, reported growth in profits.

The volatility in profit growth in the case of the larger companies comes even as the sector is set to undergo further convulsions. Post-June 2005, consumers may be given the freedom to choose the utility they would like to draw their electricity from. Changes in tariff regulation are set to follow too.

These changes follow the scheme of settlement, unveiled in 2003-04, for securitisation of dues from State electricity boards. The scheme imparted financial flexibility to public sector power producers, improving their financial health and profitability.

Central public sector units have since been able to collect almost 100 per cent of their dues from power producers, a momentous change.

Notwithstanding the volatility in profit growth, power producers are however placed in a far superior position. In aggregate terms, power producers earned a return on net worth of nearly 14 per cent in the year ended March 2004 and may end up FY 2005 with a return on net worth of about 12 per cent.

In contrast, SEBs are wallowing in losses. The Economic Survey expects the negative rate of return for SEBs to persist at 28 per cent for 2004-05 an 2005-06.

The situation is in marked contrast to other industries where players who service the end-customer by intermediating between the producer and the user make more profits than the producers themselves.

In the power sector, except SEBs, other players - power producers such as NTPC, equipment makers such as BHEL and financiers such as Power Finance Corporation - are in financially healthy condition.

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