Modi govt plans ‘Pariwartan’ scheme for power sector revival

The ‘Pariwartan’ scheme aims to protect the value of stressed power projects


power

The government plans to warehouse stressed power projects totaling 25,000 megawatts (MW) under an asset management firm to protect the value of the assets and prevent their distress sale under the insolvency and bankruptcy code till demand for power picks up. Under the scheme:

  • the projects will be transferred to the asset management and rehabilitation company (AMRC) at net book value, wherein it will own a 51% stake in the projects and the balance 49% will be held by the lenders.
  • the promoter’s equity will be reduced to facilitate a transfer of management control to the financial institutions, and
  • the lenders will convert their debt into equity.

The AMRC will then manage the projects in exchange for a fee and may ask utilities such as NTPC Ltd to operate and maintain them.

Why is this important

The stressed projects which have been built at a cost of Rs 5 crore per MW were drawing bids only for around Rs 1-2 crore per MW under the insolvency and bankruptcy code resulting in a huge loss in value. Promoter’s kept on losing interest as these projects were clouded by issues like paucity of funds, lack of power purchase agreements and fuel shortages leading to lower valuations.

With Pariwartan scheme, government plans on saving value of these assets. It expects strong economic growth and schemes such as Saubhagya will improve demand and bring these assets back in play.

How will the stocks be impacted

Don’t expect any relief for power stocks in the near term. However, if demand situation does improve in the future we can expect the power stocks {NTPC: CMP: 156, Mcap: 1,28,546.8, FY20E P/E of 8.8x} to benefit positively.

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