Industry Risk Score : Power Transmission

Executive Summary

While India's power transmission segment has been gaining momentum, it remains the Achilles heel for the entire power sector due to insufficient power evacuation infrastructure. Power demand slowed down in FY 2016-17, but is likely to have surged in FY 2017-18 on the back of accelerating economic growth in the country. Power deficit (demand-supply gap) has greatly reduced and FY 2016-17 deficit was lowest in the last two decades. The projected two-fold rise in power demand in the next decade is likely to be followed by the need to build generation capacity, which essentially needs the existing transmission system to gear up to accommodate new demand. Acuité thus sees demand in the transmission segment to be on an upsurge. Besides, given the inadequate inter-state transmission network, high capital expenditure has been planned by the government over the next decade.

Renewable energy installations are likely to see a significant surge in the coming years. Integration of renewable energy (RE) alongside conventional energy in the grid system calls for higher grid stability and adoption of advanced technologies. Various projects such as the Green Energy Corridor and international technology assistance should help ease these concerns to some extent.

The Ministry of Power has increasingly emphasised on the need for grid transformation with focus on digital or smart grids. Besides, significant capital allocation has been made towards expansion of transmission lines and sub-stations.

The sector also faces some supply-side bottlenecks such as in ordinate delays in getting clearances, lack of financing available to private players owing to a long drawn concept-to-commissioning process, outdated technology, preferential treatment to state-owned utilities in awarding new projects, and lack of compensation policy from the government to ease out the problem of land clearances.

Improving the evacuation infrastructure, reducing transmission losses and increasing inter-state transmission call for higher capital investments. To meet this requirement, the government is gradually promoting private participation by awarding transmission projects through competitive bidding and partially decoupling the role the dominant player, Power Grid Corporation of India Limited (PGCIL). While this has helped improve the share of private players in the sector, their participation remains low.

Key Risks & Attributes

  • Procedural delays through concept-to-commissioning of new transmission projects
  • High risk of curtailment for renewable energy sources
  • Gradual increase in investments by private sector players
  • Infrastructure upgradation and replacement cost to rise
  • Decoupling of role of Power Grid to foster competition,nevertheless impact to be largely positive
  • High regulatory oversight, but developments are favourable

Demand & Supply Scenario


Overall, the power deficit position in the country has greatly improved from a double-digit demand-supply deficit of -12.7% during FY 2009-10 to -0.7% in FY 2017-18, the lowest since 1992 . The total energy demand-supply deficit stood at 6,473MU in FY 2017-18, compared with 83,950MU in FY 2009-10, thanks to transmission capacity additions, capital investments and reforms in the past few years, particularly since 2014. The National Democratic Alliance government, which has made boosting power generation a key policy priority, is looking to supply adequate power at affordable prices, with the aim of doubling electricity generation to two trillion units by 2019. The centre has set a target of bringing 24x7 'power for all' by fiscal 2019.

While India's power generation capacity is largely sufficient,the evacuation infrastructure lags behind. Generation capabilities are not equally distributed across the country, and are concentrated in select regions with access to natural resources. Hence, excess power generated in some pockets of the country need full and efficient evacuation and correspondingly, supplied to deficit areas. This has been one of the key challenges, given insufficient inter-regional links coupled with high transmission and distribution (T&D) losses of around 22% (compared with ~9% global average). The Central Electricity Authority (CEA) has projected requirement of almost 62% capacity enhancement for the inter-regional links from the current 78GW to 126GW, during the next planning period . Various high capacity transmission corridors are in various stages of implementation and most are likely to be commissioned by 2021.

As on November 30, 2017, India had 381,671 circuit kilometres (ckm) of transmission lines and 791,570 MVA of sub-station capacity, reflecting a growth of 43% and 81%, respectively, from the end of the 11th Five Year Plan (FYP) or an overall growth of about 40% in the transmission capacity. However, this growth has not been commensurate with the growth in the generation capacity, which came in at around 64% by the end of the 12th FYP from the end of the 11th FYP.

The draft National Electricity Plan3 (NEP3) indicates a nearly two-fold increase in the total generation capacity by 2027, from 330GW in 2017. Nearly 57% of this is projected to come from non-fossil fuels (currently, close to a quarter). This also indicates the need for significant capacity expansion in the current transmission structure, in the absence of which, full and efficient evacuation from generation companies would be difficult, leading to lower plant load factor, cost overruns and thus higher losses at gencos. The ambitious capacity expansion plans in the RE segment particularly calls for commercially viable storage solutions to maintain grid stability,which cannot be accommodated in the current system due to grid congestion.

With accelerating economic growth in the coming years, coupled with various state-projects such as Make in India, Ujwal DISCOM Assurance Yojana(UDAY), rural electrification and shift towards renewable energy sources from conventional energy sources, amongst others, investment in the transmission sector in India is likely to grow at a fast pace. The NEP3 estimates investment of Rs.2.6 trillion in the transmission sector by 2022, with the addition of about 106,000ckm of transmission lines and 292,000MVA capacity of sub-stations.

Given the large-scale investment requirements, the government is trying to rope in private sector players through tariff-based competitive bidding (TBCB) and public-private partnerships (PPPs),which is a positive move. However, we also envisage some supply-side bottlenecks,mainly inordinate delays in getting clearances, lack of financing available to private players owing to a long-drawn concept-to-commissioning process, outdated technology, high degree of regulation and preferential treatment to state-owned utilities in awarding new projects. Resolution of these bottlenecks should ease the time and cost overruns in transmission projects.

Acuité expects demand in the transmission sector to continue to be high, but supply-side bottlenecks to remain. Industry growth risk remains low driven by growing demand for generation capacity and government's robust plans towards transmission projects.

Nature & Extent of Competition


Transmission market is gradually emerging from a monopolistic to a competitive one,with the government opening the sector to private players. All the five regions in India are synchronously inter-connected with the national power grid, which is maintained by state-owned PGCIL. While PGCIL is the only inter-state transmission utility (STU), there are about 36 intra-STUs, majority of which are stateowned. The sector is fairly concentrated, with PGCIL alone wheeling 45% of power within the country and possessing a transformation capacity of 325,345 MVA, which is around 41% of the total available transformation capacity in the country.

Apart from buying operational assets, more companies are looking to bid for projects, both for power grid EPC (engineering, procurement, construction) projects as well as for the PPP-BOT (public-private partnership on built, operate, transfer) projects, Private players can either enter through joint ventures with the central transmission utility (CTU) or STUs, with at least 26% interest held by CTU or STU or through independent power transmission projects awarded through competitive bidding. Only about 7% of the overall transmission network in the country is run by private companies. Some of the leading players are KEC International, Sterlite Grid, Kalpataru Transmission, Essel Infra projects, L&T Infrastructure Development Project, Adani Power and Tata Projects, which are largely integrated firms.

Procedural delays in awarding projects, is also responsible for dampened progress in the projects commissioned in recent years. Projects awarded through the TBCB route plunged by over 50% YoY in FY 2016-17. In total, close to Rs.3.4 trillion was invested in the sector from FY 2012-13 to 2016-17. Of this, only about 17% or 37 projects were awarded through competitive bidding.

PGCIL often commands its market share, given its access to low-cost funding, and extensive experience in the industry, raising the entry barriers for the new players. Power Finance Corporation plans to provide funding assistance for independent transmission projects, which should somewhat ease the funding pressure on private players and boost their participation.

Going forward, private sector investment in the transmission segment is likely to be driven by: lucrative rate of return of about 16% (similar to generation business) coupled with scope offered by massive generation capacity expansion targets,which in turn drives transmission capacity expansion; increasing penetration in the RE segment; favourable government reforms, and most importantly, the proposal to spin off the CTU functions from PGCIL to other firms, which should provide a level playing field to prospective bidders participating in procuring transmission projects.

Acuité expects competition in the sector to remain moderately favourable, leading to gradual fragmentation in the market landscape in the long term. Lucrative returns are likely to encourage existing firms in the power sector to become integrated players. Further, government intervention in easing funding access and reducing procedural may improve attractiveness of private investments in the sector.

Input Related Risk


The sector is highly capital intensive and thus has high and long-term funding requirements. Loans are typically long term with the highest risk arising in the pre-commissioning period (of 3-4 years) affecting financial viability of the project.

While new projects or projects under construction face more risk, operational projects reflect minimal risk due to stable project returns. Under-construction projects typically face execution risks, such as forest and environmental clearances, right of way (ROW) or land acquisition clearances and fluctuations in raw material prices, which could lead to time and cost overruns.

Overall, outlay for equipment and material replacement and upgradation remains high in the sector with a number of planned inter-regional transmission corridors, some of which are high-transmission corridors with typically high average material cost. With commodities such as nickel, platinum, cobalt, lithium and vanadium amongst other comprising key raw material components, the sector's exposure to commodity price fluctuation is expected to be high, particularly in case of under-construction projects.

Central Electricity Authority (CEA) has estimated an investment of Rs 2.6 lakh crore till 2022; about Rs 1.6 lakh crore would come from states and the other Rs 1 lakh crore from Power Grid Corporation of India . Inter-regional capacity addition during the 13th plan (2017-22) is estimated at 45,700 Mw, from the present 63,650 Mw by the plan end, said CEA in the draft. The investment includes an estimate of Rs. 30,000 crore in transmission systems below 220 kv. Various high capacity transmission corridors are in various stages of implementation and most are likely to be commissioned by 2021.

Historically, India's T&D sector has remained under-invested. Seeking funding arrangements for these projects for private players, in particular, has been a key challenge. "In an ideal scenario, investment in the T&D and power generation segments should be in the 1:1 ratio. However, the long-term average ratio between investments in power generation capacity addition and T&D segment over CY51-96 has remained 1:0.45. In the X and XI Five-Year Plan also, the ratio of investments has remained in the same range.

Acuité believes input-related risks, especially those related to project financing to be low-moderate, particularly due to a long-drawn concept-to-commissioning process, which is materially impacted by delays in obtaining clearances.

Regulatory Risk


The sector is highly regulated by the government. The ISTUs are governed by the Central Electricity Regulatory Commission (CERC) and the intra-STUs are governed by the State Electricity Regulatory Commission (SERC). The transmission networks at central and state levels are governed by the CEA, CERC and SERC, as the case may be. Power System Operation Corporation Limited (PSOCO) governs the national and regional grids. The CERC and SERC are also involved in tariff determination at central and state levels, respectively

Power tariffs are regulated by the government. Inter-state transmission companies need to follow point of connection (POC) based transmission pricing regime, which is based on distance and direction and utilisation of network. All charges are collected (in a co-mingled pool), and disbursed by the CTU from the designated inter-state transmission system customers (DICs). While this shields transmission companies from any likely default on the part of DICs, the only risk in such pricing system lies in delay in payment from customers, which could affect the transmission company's cash flows.

Despite high degree of regulatory supervision, the ongoing regulatory changes largely present a favourable environment for companies operating in the sector, thus encouraging the role of private players, revolutionising the vertically integrated operating model of the industry, coupled with high capital support from the government. This is however curtailed by long drawn and politically influenced resolutions in case of any conflicts.

A key regulatory challenge relates to acquiring ROW clearances from relevant authorities, which takes approximately two years. According to a CII report , around 120 transmission projects have been delayed due to failure to get land acquisition clearances and a few were forced to change the route, leading to disruption of the entire transmission project plan.

Being a politically sensitive sector with significant government control, Acuité believes regulatory risk to be moderately high. While regulatory pressures loom large on power sector in general, the transmission sector is mostly insulated due to current contractual structures.

Technology Risk


Technology changes in the sector have taken the centre stage. With focus on creating smart cities and smart towns in India, there is also significant emphasis on setting up smart technology in the transmission sector to enable efficient monitoring, minimise T&D losses and ensure efficient peak load management. The Ministry of Power has already allocated 14 pilot smart grid projects in various regions within the country for which Rs.32 billion was allocated in FY 2016-17. Besides, several other tech savvy platforms to improve transparency in the transmission sector have been launched. Some of the platforms are Transmission App for Real Time Monitoring and Growth (TARANG), e-trans web portal to facilitate TCBC transmission projects, and Discovery of Efficient Electricity Price (DEEP).

As the generation mix shifts toward RE sources, demand for advanced transmission system technology, in order to integrate renewable alongside conventional power in the grids, is likely to rise. This is supported by Green Energy Corridor project and technical and financial assistance from Germany.

Acuité views technology risk to be low. However, investment in technology is likely to remain high in the near term, to improve efficiency of existing grids, reduce transmission losses and harness energy produced through renewable resources

Operating Margin


The median operating margin stood at 89% in FY2016-17. The operating profit of the static pool increased by 20.9% on y-o-y basis on account of strong growth in operating income (particularly transmission income which forms major portion of operating income) and the cost-plus nature of tariff for transmission business.

Interest Coverage


The interest coverage of the industry was marginally favorable last three years. The median interest coverage for FY 2016-17 was 1.63 times as against 1.77 times in FY 2015-16. While the sector is highly leveraged, interest coverage remains somewhat favourable due to high operating margins of the players.

Return on Capital Employed


The median ROCE declined during the study period; however, it remainedvery low at 3.07% in FY 2016-17. This is on account of capital intensive nature of the business.

Debt / Equity


The industry had an average median gearing of 2.94 time over the three-year period. The capital structure of the industry remained leveraged on account of capital intensive nature of the business.



The industry had a median GCA of 94 days in FY 2016-17. This is favourable mostly on account of timely payments from state distribution utilities. Payment cycle is expected to improve on account of UDAY scheme which has improved the liquidity profile of state distribution utilities.

Industry Financials and Medians

Fact Sheet (As on Year Ended March 31st)SUM Unit 201703 201603 201503
Net Sales Rs. Cr. 33,494 27,775 23,507
OPBDIT (Excl. NOI) Rs. Cr. 25,931 21,450 16,959
Depreciation Rs. Cr. 8,682 7,224 5,733
PAT Rs. Cr. 8,282 6,732 5,477
Net Cash Accruals Rs. Cr. 16,965 13,956 11,210
Networth Rs. Cr. 55,068 48,283 42,102
Total Debt Rs. Cr. 129,669 120,638 108,402

Median Unit 201703 201603 201503
EBITDA Margin % 89.15 88.26 88.13
PAT Margin % 10.29 17.01 15.28
ROCE % 3.07 4.34 3.29
Interest Coverage Times 1.63 1.77 1.80
Debt to Equity Times 2.67 3.18 2.99
Debt to EBITDA Times 4.22 5.03 6.49
GCA Days Days 173.12 84.27 86.35

The entities considered in the static pool are as under:
List of Companies

Company Name
Adani Transmission (India) Ltd.
Aravali Transmission Service Co. Ltd.
Kalpataru Power Transmission Ltd.
Maharashtra Eastern Grid Power Transmission Co. Ltd.
Maru Transmission Service Co. Ltd.
North East Transmission Co. Ltd.
Power Grid Corpn. Of India Ltd.
Power Transmission Corpn. Of Uttarakhand Ltd.

IRS Definitions

Acuité Industry Risk Scores are assigned on a six-point scale, with 1 indicating 'High Risk' and 6 indicating 'Highest Safety'. The intermediate scores are defined in the table below:

Industry Risk Score Risk classification of the Industry
ACUITE IRS 1 Highly Unfavourable
ACUITE IRS 2 Unfavourable
ACUITE IRS 3 Neutral
ACUITE IRS 4 Marginally Favourable
ACUITE IRS 5 Favourable
ACUITE IRS 6 Highly Favourable

Data Sources & Credits

1. Confederation of Indian Industry
2. Ministry of Power
3. Power Grid Corporation of India Limited


Acuité IRS should not be treated as a recommendation or opinion that is intended to substitute for a financial adviser's or investor's independent assessment of whether to buy, sell or hold any security of any entity forming part of the industry. Acuité IRS is based on the publicly available data and information and obtained from sources we consider reliable. Although reasonable care has been taken to ensure that the data and information is true, Acuité, in particular, makes no representation or warranty, expressed or implied with respect to the adequacy, accuracy or completeness of the information relied upon. Acuité is not responsible for any errors or omissions and especially states that it has no financial liability whatsoever for any direct, indirect or consequential loss of any kind arising from the use of Acuité IRS.

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