Synopsis:
- To address the increasing power demands, it is anticipated that the power sector will add approximately 212 GW of total capacity during FY22-FY27. This is in comparison to the existing capacity of about 426 GW as of November 2023. This expansion will necessitate substantial debt investment, estimated at around ₹10.9 lakh crore for the period FY22-27.
- Infrastructure finance companies (IFCs) specializing in power, with their improved asset quality, declining debt-to-equity ratios, and enhanced profitability, are well-positioned to finance this expected growth. It is projected that disbursements by these companies will reach ₹2.9 lakh crore in FY24, an increase from approximately ₹2 lakh crore in FY23. A significant portion of this funding is likely to be allocated to the renewable energy sector, which is expected to comprise 14% of the total loan portfolio by FY24.
- The increasing disbursements have enabled power-focused IFCs to consistently expand their market share relative to banks. While banks’ exposure to the power sector has remained stable, the loan portfolio of power-focused IFCs has grown at a compound annual growth rate (CAGR) of 9% over the past three years.
- This growth is also evident in the financial profiles of these IFCs, which have been showing signs of improvement. Owing to better asset quality and reduced credit costs, these companies are expected to report robust profitability metrics, with a Return on Total Assets (RoTA) of 2.8% in FY24.
- Traditionally, the borrowing profile for power focussed IFCs has been dominated by market instruments. However, over the past few years, due to pricing differentials, the share of bank borrowings (in overall liability profiles) has been gradually rising. Going forward, with the new RBI regulations, the share of bank borrowings in the overall liability profile of these entities is likely to moderate.
- CareEdge Ratings forecasts that power-focused IFCs will maintain a healthy growth rate in the medium term. The gross loan portfolio is expected to grow by 16% year-over-year in FY24 and by 15% year-over-year in FY25. However, risks to this growth potential include client and sector concentration, increased exposure to the private sector, and challenges arising from inflationary pressures and consequent policy tightening.
