Welspun won’t be earnings accretive for Tata Power

DURING the Conference Call held to explain 100% acquisition of Welspun Renewable Energy (Welspun) Tata Power’s MD stated that 1.1GW assets- would be operational by FY17 with 100% long-term PPAs; are expected to earn 14-16% ROE and would be acquired largely through debt (EV of Rs 92 billion, 1.5x BV). Tata Power seems to be pursuing its long-term objective of increasing share of renewable energy (RE) in generation portfolio. Though, in near term, this would increase its balance sheet risk, in our view.

Tata Power’s 100% subsidiary will pay `92 billion EV and acquire Welspun’s operational and under-construction assets aggregating to 1.14GW (1GW solar, rest wind). All operational (1GW) and under-construction (150MW) assets have 100% long-term PPAs in place and to that extent Tata Power seems to have avoided execution risks.

We estimate Tata Power to pay 1.5x BV to acquire the assets and finance the acquisition largely through debt. We do not expect the acquisition to be ear nings accretive in initial years, considering the funding structure.

However, we remain concerned on consistent collapse in rates of PPAs signed by RE developers (`4-5/unit) and sustainability of older PPAs signed at `8-9/unit. Change in such PPA terms due to weak financial health of the SEBs and flux of RE projects present key risks to the acquisition economics.