Tata Power's Mundra project faces rupee headwinds

Recommendation for higher compensatory tariff may not be enough to absorb 20% fall in rupee

The Deepak Parekh committee’s recommendation for a higher compensatory tariff to Tata Power’s Mundra project will not be enough to absorb the 20 per cent depreciation in the rupee since this year and the project will continue to bleed, say analysts.

Tata Power’s Mundra subsidiary, Coastal Gujarat Power Ltd (CGPL), has a massive $1.7 billion of foreign loans. The company is also importing coal from Indonesia. With the rupee hovering around Rs 65 against a dollar, the Parekh committee’s recommendation to give a higher tariff of Rs 0.59 a unit may not be enough as the recommendation was based on the rupee at 55.

The tariff hike is still not cleared by state governments.

In FY14, the effective interest cost on CGPl's loans will be around Rs 1,227 crore and of this, Rs 556 crore will go for repayment of foreign exchange loans, according to the minutes of the committee meeting.

The repayment on forex loans will rise substantially with the fall in the rupee’s value as the company’s fund flow is not expected to be very healthy. The committee has, therefore, recommended that lenders approach the Reserve Bank of India for a reduction in interest rates, moratorium on principal payment for two-three years and elongation of the loan repayment period.

An email sent to Tata Power seeking comments on the impact of rupee depreciation did not elicit any response.

According to the minutes, the lenders told the committee the project would have a good case for interest reduction if the company’s ratings improve after the approval of compensatory tariff. As of now, all loans to the project are frozen.

The project was awarded to CGPL in December 2006. Later, CGPL entered into power purchase agreements with Maharashtra, Gujarat, Rajasthan, Punjab and Haryana. But since then, there has been an unprecedented escalation in coal prices and a new Indonesian law, which mandated coal to be sold to outsiders at a far higher price. The Indonesian law eliminated the discount of 30 per cent over market prices assumed by CGPL in its bid.

During the committee meetings, CGPL asked Indian banks to take a haircut on its loans and sought a moratorium on the payment of the principal amount. But this suggestion was rejected by the banks citing RBI regulations. The matter will now be sorted out by RBI.

The project was financed with Rs 5,850 crore of rupee loans and $1.726 billion of forex loans. The rupee lenders are charging the interest rate of State Bank of India plus 280 basis points. All banks have stopped disbursal of loans since July 2012 on account of perceived unviability of the project and CGPL arranged funding from promoters and other sources to bridge the gap.

Tata Power may have to go through regulatory process until it actually gets tariff relief in Mundra ultra mega power project (UMPP). Both domestic and foreign lenders have capped the disbursement to the Mundra project at 83 per cent of the sanctioned limits on account of the perceived unviability of the project.

Moreover, the Central Electricity Regulatory Commission may recommend to the government to reduce the import duty on coal and other taxes to mitigate the burden of compensatory tariff for the procurers. The Mundra UMPP is subject to royalty/duty on imported coal and currently, it is estimated to be 6.29 per cent.