In early 2008, Tata Power tied up loans worth Rs 17,000 crore for India’s first ultra mega power project in Mundra.
For the 4,000-Mw project, the company had also raised funds through external commercial borrowings (ECBs), a strategy adopted by many of its peers such as Reliance Power, which raised loans from Chinese banks, and Adani Power.
Traditionally, power projects, which have all their revenues tied up in rupees alone, have stayed out of forex exposure. But some private utilities broke the rule for two reasons: First, many ordered their equipment from foreign companies.
Second, and more importantly, ECB interest rates are extremely attractive. “There was a cap of five% interest on ECBs. At that time, they were offering loans at four% interest, while rupee loans came at 11%,” said Debashish Mishra, senior director at Deloitte Touche Tomatsu.
Good times & ECBs
That was at a time when the rupee was trading at about 45/dollar; the currency had been trading at 45-47/dollar for seven years since then. But now, with the rupee hitting 68/dollar, Tata Power is facing a crisis---Mundra faces a massive dollar loan liability of $1.4 billion.
Till June 2012, Tata Power was sitting comfortably on these loans, as it had hedged the liabilities. When asked if the company had hedged for the rupee at 55-56/dollar, Managing Director Anil Sardana, had confidently said, “Yes, we are hedged.”
Now, that confidence is missing. At the company’s recent annual general meeting, Sardana said, “The only option left is to go for more and longer hedges, against headwinds. Even if the company were to hedge all its forex exposures, the costs of hedging would be phenomenal. The way it is going, there is no liquidity with banks that is possible to hedge it with.”
The cost of hedging, Mishra said, worked out 6-6.5%.
Sardana says if the company goes ahead and hedges at high costs, it would impact rates. “It is to be seen whether consumers, who would ultimately suffer, would be able to absorb an increase of about 50 paise in rates,” he said.
State electricity boards have been raising rates for consumers after facing financial woes. But, as costs pile up, they might choose not to buy expensive power.
The company’s earlier expensive hedges, too, have failed. The dollar loan, which could have been worth Rs 6,300 crore if the rupee stood at about 45 a dollar, would stand at Rs 9,500 crore at current rates. “At this rate, debt servicing will be a huge problem,” Sardana admitted.
In the realm of losses
This unprecedented crisis comes at a time when the imported coal-based Mundra project is already is fast eroding the company’s net worth. The outlook suggests a huge increase in interest costs due to forex fluctuations, as the plant is recording losses due to increased fuel costs.
Owing to a change in Indonesian laws two years ago, the company was compelled to price its imported coal at international prices. The new regulation stated coal sold from the country should be indexed to international prices and revised annually. This made the company’s strategy to control fuel costs go haywire.
Earlier, Tata Power had bought stakes in three Indonesian coal mines, hoping to stabilise coal costs.
Fuel costs account for about 70% of the total costs of producing power.
For the quarter ended December 2012, Tata Power made a Rs 600-crore provision for possible losses from Mundra. In 2011-12, the company had provisioned Rs 1,800 crore towards Mundra’s losses.
The company’s plea with the Central Electricity Regulatory Commission to raise power rates has received a positive nod, with the regulator appointing a committee to decide the extent of the rise in rates. According to reports, the rise has been fixed at 56-58 paise a unit.
“This implies a jump in rates of around 24% from the existing tariff of Rs 2.45 a unit. While this would still not take return on equity (RoE) to 14% (the cost of equity assumed for the project), it would definitely turn Mundra profitable and lead to a positive stock reaction, as the implied RoE on this new rate is about seven%,” said a report by Ambit Capital.
Stock slips on rupee worries
The Tata Power stock has corrected 24% in a year. It has under-performed the volatile Sensex by 27%, owing to the overhang of various issues in the power sector and specific problems related to Mundra. Earlier this month, the stock hit a four-year low, falling 18% on the day it announced a Rs 1,147-crore loss for the quarter ended June.
This was due to a forex loss of Rs 292.7 crore on realignment of liabilities resulting from a weaker rupee and higher finance costs for the Mundra project.
“Now, measures have to be taken at the country-level,” Sardana said when asked about the rupee’s depreciation.
It is over to the government, yet again.
