Tata Power: Too early to rejoice

Analysts believe even if the tariff increase is allowed for the company's Mundra project the benefits could be limited

Post the CERC judgment on Wednesday allowing “compensatory tariff” to Adani Power’s imported coal-based Mundra project, Tata Power’s stock rose 6.2 per cent intra-day to Rs 101.25 but finally closed 0.7 per cent up at Rs 96.05; Adani Power closed with gains of 8.8 per cent.

Although the markets fell in the latter half which could be partly attributed to the Tata Power stock giving up most of the gains, analysts also believe that while being positive, the judgment may not lead to significant gains for Tata Power’s Mundra project as initially envisaged. Secondly, there are other issues in terms of implementation of the judgment, mechanism of compensating for Tata Power’s stake in coal mines, etc, which need clarification to ascertain the gains for the company. Until then, the gains for the stock too will remain restricted.

Tata Power’s Mundra project sources its coal requirements from Indonesia-based mines. In the past, the project suffered due to the unfavourable ruling of Indonesian government on the transfer pricing of the coal being exported from that country. This led to an increase in the cost of imported coal thereby resulting in the cost of fuel rising to about Rs 2 per unit. Mundra project’s realisation or tariff at Rs 2.45 per unit was not enough to capture this increase in fuel and other costs thereby leading to fuel cost under-recoveries of 50 paise per unit of power produced. The management had earlier said that a 40 paisa per unit hike in tariff will help the project break-even, while a 65 paisa increase will ensure reasonable returns. Due to under recoveries, the Mundra project reported a net loss of Rs 830 crore in the December 2013 quarter, taking the first nine months (FY13) loss to Rs 1,455 crore. With the last of the five units of 800 Mw each having commissioned recently, the losses are only expected to increase further for the Mundra project.

However, in the case of Tata Power it also makes a good amount of profits on the coal supplied to the Mundra project as it owns 30 per cent stake in the Indonesian mines which supply this coal. This is also a reason that analysts do not see major benefits accruing to Tata Power even if a similar ruling or notification (like in the case of Adani Power) comes through for the Mundra project. For instance, analysts say that Indonesian mines produce about 65 million tonnes of coal and earn an earnings before interest, taxes, depreciation and amortization (Ebitda) of about $40 per tonne and about $20 per tonne as net profit. Given Tata Power’s 30 per cent stake in these mines, it should effectively be able to account for about Rs 2,000 crore in annual profits, which is close to the loss that is expected to be made by the Mundra Project in 2012-13.

  The Gautam Adani-led company had sought a tariff revision due to a change in regulation governing coal imports from Indonesia, which made coal dearer. Tata Power too, has sought similar relief. While the latest CERC order has directed the setting up of a compensatory committee to look into this increase in the cost of coal and appropriate compensation, analysts believe in case of Tata Power, its profit from Indonesian mines may also be considered while arriving at the actual increase in cost. Hence, the tariff increase may not be as initially expected by the Street.

Nevertheless, this judgment has provided some boost to sentiment and should also lead to some respite for Tata Power’s Mundra project in terms of its viability. But analysts feel that to make the project profitable, the tariff should take care of reasonable returns for such transfer of benefits.