India Ratings & Research (Ind-Ra) has maintained a stable to negative outlook on the power sector for FY16, despite improving fuel supplies. Ind-Ra believes the benefits would not immediately translate into improved financial profiles. Moreover, distribution companies (discoms) are yet to see a financial turnaround as envisaged in the financial restructuring package.

Ind-Ra has also maintained a stable outlook on most of its rated power sector entities for FY16, on the back of improving fuel supply and financial health of state power utilities. The agency expects that its rated entities will continue to manage fuel and counterparty risks due to a favorable tariff mechanism, their comfortable liquidity and support from the central and state governments.

Ind-Ra expects a higher domestic coal output in FY16, driven by the improved performance of Coal India Limited and the fast-track e-auction of cancelled coal mines. Though the government of India (GoI) has set a target of 1 billion metric tonnes (bnt) coal for Coal India by FY20 (CAGR of 14.9%), the agency expects growth of 5%-6% in production and dispatches and 8%-9% growth in supplies to the power sector.

The agency also expects that the successful auction of coal blocks post the introduction of reforms in the coal sector by way of Coal Mines (Special Provisions) Ordinance 2014 would  lead to an increase in the share of captive coal blocks to 11% in FY16 (FY14: 9%). The overall improvement in coal supplies could translate into healthy generation growth of 7.6% in FY16 (8mFY15: 10.8%). Along with electricity demand growth of 8%-9%, energy deficits could stay at the current levels (FY14:  4.2%, 8mFY15: 4.0%).

GoI has been focusing towards reviving stuck investments in the sector though there is limited planning for fresh capacities. Ind-Ra expects capacity addition plans for the XIIIth Five-Year Plan to remain muted in the near term. The private sector participation is likely to remain low given lack of clarity on coal and gas availability for fresh capacity.

GoI’s action directed towards resolving coal supply issues and financial health of discoms could improve investor interest in the sector. Depreciated rupee and the deleveraging plans of independent power producers with stretched balance sheets would further fuel investor interest.

Ind-Ra expects capacity additions in the renewable energy sector in FY16 to be driven by the solar segment on the back of a strong policy thrust by GoI. The share of solar capacity in the renewable energy sector is likely to increase to 11% in FY16 from 8% in 8mFY14. Additionally, Ind-Ra believes solar-based capacity addition has reached a tipping point in terms of grid price parity (INR6.0/kWh-INR7.0/kWh) and hence could see accelerated adoption.