Tata Power: Power, uninterrupted

The Narendra Modi-led BJP’s resounding victory in the Lok Sabha elections, has led to all sectors pinning high hopes on the upcoming Budget. The power sector, in particular — despite various reforms like the UDAY, ‘Saubhaghya’ scheme or the ‘24*7 Power for All’ initiative — continues to ail and is in dire need of structural reforms. Non-availability of fuel, projects set up without linkage, lack of power purchase agreements (PPAs), and tariff-related disputes continue to dog the sector.

With expectations high from the new government to push forth reforms in the sector, Tata Power, an integrated power company, is well-placed to benefit. Along with its subsidiaries, Tata Power has presence in power distribution, transmission and generation (thermal, hydro and renewable). While continuing losses at its Mundra thermal power plant in Gujarat has kept the stock under pressure, the company’s focus on renewable energy and efforts to de-leverage its balance sheet by selling non-core assets, are positives.

However, given the uncertainty over the time it could take to resolve the Mundra plant issue and the structural challenges within the sector, only investors with a higher risk appetite can buy the stock, with a long-term perspective.

The stock trades at a cheap price-earnings multiple of 7.62 times its 12-month trailing earnings, compared to peer NTPC (10.57 times). The stock has fallen by a sharp 17 per cent over the past year. Investors with a long-term horizon can consider buying the stock at current levels.

Integrated power business

Over the past few years, Tata Power has been moving slowly into the renewable energy space. This, it has done through acquisitions, and setting up its own solar and wind power plants. Renewable energy now makes up nearly 30 per cent of Tata Power’s over 10,000 MW installed power capacity. Renewable power has aided Tata Power’s overall operating profit. The company has stated that it is going to aggressively expand in the renewable space by bidding for the nearly 20,000 MW renewable power projects that the government will auction this year. Additionally, renewable power projects get cheaper credit.

In renewables, Tata Power (including subsidiaries) has a total installed capacity of 2,549 MW, which includes its assets abroad. The company has around 400 MW of renewable capacity under construction. It has also entered service businesses like charging stations for electric vehicles by tying up with oil marketing companies, and is also undertaking EPC projects for solar energy projects like installing roof-top solar panels.

Awaiting resolution

The thermal generation capacity is around 7,200 MW, including its Mundra subsidiary, Coastal Gujarat Power. Tata Power is also in the transmission and distribution business and has distribution franchises in Ajmer, Mumbai and Delhi.

The company is awaiting a Central Electricity Regulatory Commission decision that will allow it to increase its tariff to compensate for an increase in fuel cost, at its 4,000 MW Mundra thermal power plant. The relief expected is based on a High-Powered Committee report of the Gujarat Government that has come out with the formula of sharing the cost of such relief among consumers, lenders and the power producers.

This case went up to the Supreme Court, which ordered that the regulator should decide on the quantum of relief.

Adani Power’s petition for an increase in its tariff to recover higher fuel costs was approved by the regulator, solely because its PPA was only with one state power distribution company, that is, Gujarat.

Tata Power’s PPA is with five states — Gujarat, Maharashtra, Punjab, Haryana and Rajasthan. The regulator has asked for views from the state discoms of all five states after Tata Power filed the petition.

In the meantime, the company has been blending low-grade coal to stem the losses at Mundra. The under-recovery of fuel cost has remained static at ₹0.84 per unit, as the company managed to reduce the cost of coal in FY19 through such blending of lower-grade coal.

Tata Power also acquired a coal mining licence in Russia to explore cheaper and sustainable coal supply for the Mundra plant.

High debt

Mounting losses at the Mundra plant has led to Tata Power’s debt increasing over the last few years. The company has been selling non-core businesses like defence and stake in Tata Communications to bring down its debt. The sale of its defence business, which is part of the reorganisation of the Tata Group, is expected to be completed by end of 2019. The company is also evaluating the right time and valuation to divest its stake in Tata Projects Ltd, which the management expects to complete in 2019-20.

The effort to bring down high levels of debt has led to Tata Power’s consolidated debt-to-equity ratio fall to 2.19 times in FY19, from 2.4 times a year ago. Interest coverage ratio, however, has remained stagnant at 0.58 at a consolidated level.

The total consolidated debt fell marginally to ₹48,506 crore at the end of FY19, compared with ₹48,589 crore. The rise in interest costs in FY19 (₹4,170 crore vs ₹3,761 crore) continued to weigh on Tata Power’s consolidated earnings. Net profit came in at ₹2,440 crore in FY19, compared with ₹2,611 crore in the previous year. Revenue rose to ₹29,558.64 crore in FY19, compared with ₹26,840.27 crore.

Risks

Any delay in resolution of the fuel pass-through issue at Mundra power plant will affect the company. A speedy resolution, either by splitting the consolidated PPA with the five states into different PPAs, and letting consenting states allow the pass-through of higher fuel costs, or all states consenting to the higher tariff, would boost profitability.

Tata Power’s focus on renewable power and an asset-light model is likely to hold it in good stead in the long run. The company’s plan to bid for stalled thermal power projects with fuel linkages and guaranteed PPAs, will help conserve capital for investment in the high-margin renewables business.

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