Debt cloud over Mundra Power

Adani Power's board to discuss an option this week, in wake of adverse SC order on compensatory rate

Adani Power has met its debt repayment obligations thus far but might need to do more to ensure it remains so. 

“Concerns do remain, as the compensatory tariff (rate) order (on its Mundra project, disallowing a higher one for a higher imported coal price) has been a dent on its financials,” said an analyst tracking the company, who did not wish to be identified. 

He noted the equity infusion by its promoters in 2016-17 had helped the company meet its debt obligation – they’d infused close to Rs 1,700 crore. There’s been no indication to analysts of any plan to infuse further equity in this financial year. 

In April, the Supreme Court ruled against allowing any compensatory rate on the ground of a change in international regulations. Supply rate for the Mundra (in Kutch, Gujarat) project had been based on a certain level of imported coal prices, on which it runs. The import price is now much higher than that assumption. Adani Power had to, after the court order, write off the receivables it had listed from the expected compensatory rates. 

“A key negative highlight of the March quarter result was the Rs 36.5 billion (Rs 3,650 crore) reversal of compensatory tariff booked on the Mundra power plant, post the ruling,” analysts with Edelwiess Research wrote in a May 29 note. The report estimated the debt due for repayment in 2017-18 and the next at Rs 2,500 crore. 

As of end-March, the company had  consolidated debt of Rs 49,231 crore. The interest coverage ratio in FY16 was 1.08; for FY17, it was negative. However, analysts add, the latter figure might not paint the right picture, as it includes higher finance costs of Rs 170 crore, on account of mark to market losses (revaluation at current prices) on derivatives in the fourth quarter. 

“The only issue is on Mundra, with respect to debt to equity. Its other plants are fine with respect to this. There’s been no timeline from the lenders on recapitalisation, as the company has been able to service the debt,” the Edelweiss report said. 

A senior public sector banker said this is presently a standard account. However, if there’s possible strain on cash flow, banks will have to revisit their assumptions, due to the effect of the Supreme Court verdict.

To curtail the financial stress from Mundra, the company is thinking of carving out this asset from the parent company and transferring it to a subsidiary, through a slump sale, the term for a transfer of one or more undertakings for a lump sum, without values being assigned to individual assets. The subsidiary to hold this asset is to be named Adani Power (Mundra) Ltd. The company’s board of directors will discuss this option in this week. According to sources, the debt related to Mundra is around Rs 15,000 crore.

“Whether the company will meet its debt obligations would largely depend on such steps and how much more active the promoter be in supporting the Mundra asset,” said the analyst quoted earlier.  

Another public sector bank executive said the model for large power projects based on imported coal had almost crumbled with the SC verdict. The lenders would have to re-examine the need for recasting of the substantial loan exposures. Both bankers, however, did not indicate when this exercise would begin on loans for Mundra.