DEBT OVERHANG

Shrinking revenues and rising debt do not bode well for the company

nies to recover compensatory tariffs from the five state discoms with which they had signed power purchase agreements (PPAs). But the discoms balked and appealed to the Appellate Tribunal for Electricity (APTEL) against the CERC order. APTEL agreed with CERC, maintaining that the Indonesian policy change did qualify as a “force majeure” event – an unforeseen circumstance preventing the fulfilment of a contract – for which there was a provision in the PPA for reviewing the tariff. The discoms then appealed to the Supreme Court which, on April 11 this year, set aside the APTEL order, maintaining that consumers should not have to bear the brunt of changes in international laws.

After this, tariff increase is virtually ruled out, but Tata Power is still seeking advice on whether it can appeal again to CERC for tariff change. It has so far invested `18,000 crore in the project – `6,200 crore equity and the rest as loans, mainly from a consortium of Indian banks led by SBI, ADB and IFC. “The interest burden started from 2013. Annually, we pay over `1,000 crore as interest and repayment,” says Sardana. “We have paid `4,000 crore principal. The Mundra debt is now `10,000 crore.” The smaller loans from local banks have been restructured, but immediate priority is doing the same with the ones from ADB and IFC. CGPL’s under-recovery was as high as 30 paise per unit in 2015/16 and 60 paise in 2016/17, leading to net losses of ` 849 crore and ` 999 crore, respectively. Operating income in the two years was `5,908 crore and `6,112 crore, respectively.

These losses would have been even higher were they not offset by the stakes in coal mining companies in Indonesia and logistics companies – including a shipping company – Tata Power acquired as part of the Mundra project. Revenues from the mining companies were `7,862 crore in 2016/17 with profit after tax (PAT) of `854 crore, while the logistics companies earned `709 crore with PAT of `204 crore. But this is not enough. “We believe profits from the Indonesian mines are not sufficient to cover Mundra’s losses at current prices,” Hiren Trivedi and Kiran Gawle, analysts with Axis Securities, said in a report. This is due to not only the high cost of importing coal but also “the high tax (45 per cent income tax), double taxation on dividends (10 per cent in Indonesia, and 15 per cent in India) and no tax savings from the $900 million debt for the Indonesian mines as they are housed in a separate SPV.” They estimate coal mining cash inflow at $53 million a year as against the $80 million loss from Mundra.

Though coal prices have fallen since 2012, and the grade of coal the Mundra plant needs costs $70 per MT, this is not enough for the plant to turn the corner. “If coal prices fall further and procurers pay 40-50 paisa more on average, we could manage,” says Sardana. “`2.26 per unit is a dream cost. You are still getting the cheapest power if you pay `2.60 or `2.70 per unit.”

Sardana is considering several options to reduce debt to reasonable levels by the end of 2018. The non-core as-

sets, such as stakes in other Tata companies, could be sold. Figures compiled by BT Research show that Tata Power holds, at current prices, `986 crore worth of shares in Tata Communications (4.7 per cent stake), ` 90.4 crore in Tata Teleservices (Maharashtra) Ltd (7 per cent), and `87.1 crore in Nelco. Tata Power also has a 40 per cent stake in the group’s investment arm, Panatone Finvest.

Similarly, some non-core businesses could be divested. “We are looking at selling businesses that do not impact the main business,” says Sardana. However, efforts so far have run into hurdles. The sale of the 30 per cent stake in the Arutmin coal mine in Indonesia, which the Bakrie Group agreed to buy in 2014, is still hanging fire, even after Tata Power agreed to lower the price. Tata Power’s strategic defence business unit, with revenues of `600 crore, could also be considered for sale, though Sardana isn’t sure. “That business has future potential,” he says. Another option is to sell the 48 per cent stake in Tata Projects or stakes in JV companies in distribution and transmission or coal-related companies. Another alternative is to sell only a part of the power produced to the contracted discoms, offering the rest in the open market at higher tariffs. The discoms have refused to consider this.

More Assets

To offset the problems with Mundra, Tata Power has also been creating or acquiring more assets, mainly in renewable energy. A number of these have been outside the country. It has set up hydro projects in Zambia, Georgia and Bhutan, and a wind project in South Africa, creating 669 MW assets in three years at an equity investment of `963 crore. But its biggest investment by far has been the takeover of Welspun Energy’s entire renewable portfolio of 1,143 MW in June last year at a cost of $1.4 billion. Welspun Renewable Energy generated revenues of `646 crore with PAT of `116 crore in 2016/17, but it also brought with it an additional debt of `5,549 crore. The deal has since become controversial with some analysts claiming that Tata Power paid too much. The ousted Tata Group Chairman, Cyrus Mistry, was accused of not keeping Tata Sons board and Tata Trusts properly informed while finalising the deal. A recent news report said Tata Sons was planning a forensic audit of the deal over corporate governance/valuation issues and speedy execution of the deal. Sardana, though, insists it was a good buy. “It is a promising asset with 100 per cent PPAs in place and revenues from day one,” he says.

With the Welspun acquisition, Tata Power is now the biggest renewable energy player in the country with nearly 2,000 MW operational assets and 326 MW in the pipeline. The biggest overall power company, however, remains Adani Power. Of these, the 423 MW operational and 326 MW under construction assets belong to Tata Power Renewable Energy Ltd (TPREL), which reported revenues of `437 crore and PAT of `66 crore in 2016/17. Tata Power also owns some more standalone wind and solar assets, with revenues of `296 crore and PAT of `34 crore. No doubt, they also carry with them a debt of `3,320 crore. “By 2018/19, the consolidated EBITDA on all Tata Power’s renewable assets will be at `2,400 crore and debt at `13,600 crore,” say Trivedi and Gawle of Axis Securities. Sardana is quite sure of the company’s future direction, given the exigencies of global warming. “Going forward, nonfossil fuel-fired capacity will be 40 per cent of our generation,” he says.

Tata Power had assets of 10,200 MW, worth `70,487 crore, as of March 2017, according to an analyst report. “Look at our assets, and we are still a very healthy and profitable company,” says Sardana. “We are not overleveraged. It is not fair to only look at absolute debt. The Welspun acquisition was funded entirely by debt and once the equity portion is converted, the ratios will be normal.” The Axis Securities’ report says Tata Power’s net debt-equity ratio will drop to 2.6 in 2017/18 and 2.2 in 2018/19.

More Issues

A capacity of 1,877 MW produces power that is bought by Mumbai discoms, for which the PPAs are up to only March 2018. Cash crunch has also made Tata Power seek external help in another venture – buying stressed coal- fired plants. It has formed a fund, Resurgent Power Ventures, to do so, with a corpus of $850 million, in which it has a 26 per cent stake. ICICI Bank holds 10 per cent, Canadian institutional investor CDPQ 30 per cent, Korea-based KIA 18 per cent, and Oman-based SGRF 16 per cent in the venture. Sardana has a lot of work ahead to bring about normalcy and stimulate growth. ~