Power - Metering the steady turnaround - ICICI Securities

Although the lockdown period was extremely difficult and challenging, it provided few unexpected learning experiences. In power sector, which was already facing stiff challenges, discom liquidity issues during the lockdown period worsened due to high cross subsidy between consumer segments, and the government had to provide support through Rs900bn loans PFC/REC among several other measures. In this regard, a key learning has been the efficacy of digital/smart meters and the difference they made to discoms in terms of billing and collection. While majority of discoms with conventional metering technology faced revenue shortages, smart meters enabled discoms to generate 95% billing efficiency and in fact increase average monthly revenue per consumer by 15-20%. Our channel checks in Noida and Patna confirm the stance that consumers are more than willing to pay for reliable 24x7 power and better services, and that smart metering is a win-win for all stakeholders.

- Proven efficacy of smart meters: Collection from consumers by discoms has been the main problem for the entire power sector value chain. Of the total all-India AT&C losses of 22% (FY19), it is estimated that 9-10% is related to T&D while 12-13% is billing and collection related inefficiencies. One of the ways the government is targeting to reduce AT&C losses is through installation of smart meters. Till date, 2mn smart meters have been installed through various GoI programmes, while EESL's smart meter programme (SMNP) aims to install 250mn smart meters. SMNP has helped increase discom revenues by an average of Rs301 per month per meter (increase of 20-50% prior to installation of the smart meter and cumulative increase of Rs2.64bn p.a.), reduce AT&C losses by 11-36%, and improve billing efficiency by 21%. Thus, even taking average revenue increase per month per meter at Rs200 and 50% of the targeted installation, potential annual increase in discom revenue/post-tax profit only on this basis is expected at Rs300bn over FY19 revenue/post-tax loss of Rs6.4trn/Rs496bn. Additional positive impact on profits will come from savings in employee cost and O&M expenses. Further benefits include network upgrade, digitisation and improved services for consumers etc.

- Now might be the best time to accelerate transition to smart meters: The effectiveness of smart meters was especially visible during the recent lockdown period during which restriction of movement prevented manual meter reading, resulting in drastic reduction in billing (up to 80% in few areas) and collections for several discoms. This in turn had a massive impact on the cashflow for those discoms which had majority conventional meters installed, during the Mar-Jun'20 period. On the contrary, discoms where smart meters were installed faced no such issues, in fact EESL highlighted that using smart meters enabled the respective discoms to generate 95% billing efficiency and increase their average monthly revenue per consumer by 15-20%.

- Data and channel checks indicate smart meters are win-win for all stakeholders: To confirm whether smart meters are indeed transformative as claimed, we conducted channel checks in two most difficult states for the sector - UP (Noida) and Bihar (Patna) - where smart prepaid meters are being implemented. In both the cities, we were positively surprised by the responses of the consumers. In Patna, where smart prepaid meter had been installed in Jul'20, the consumer was especially pleased with the overall experience of being able to monitor daily usage (and thereby manage/save better), view balance/bills, recharge and lodge complaints all through a single mobile application. Our conversations in both the cities informed us that consumers are willing and pleased to pay for uninterrupted 24x7 power and better services. Since discoms are also impacted positively we believe smart meters is a win-win for all stakeholders.

- Fast-tracked implementation can potentially lead to major upgrade for the sector: Metering will be a key component in GoI's aim to provide reliable, affordable and 24x7 power to all consumers. Fast-tracking smart meter implementation will act on all fronts and can be a game changer for the sector. The nature of power as a basic and essential commodity inherently necessitates its growth for the growth of the Indian economy. We are currently witnessing a steady transformation in the sector towards digitisation, ensuring consumers' right to power by working towards providing 24x7 power and reducing losses in order to make power more affordable. These, combined with huge power demand potential in India (India's per capita power consumption at 1,181units is less than half global average) on the back of increased instances of power usage in day- to-day activities - internet, appliances, infrastructure including metro and railways, e-services including for mobility, communication, government services, and even electrified cooking among others - continue to make us remain positive on the sector.

Source : Equity Bulls

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