Tata Power's liquidation of non-core assets to gain steam: Report

Company's debt-equity ratio seen falling to 1.96 by FY21

The liquidation of Tata Power's non-core assets is expected to pick up pace during H2 of FY20 leading to a partial repayment of non-core debt.

The monetisation of non-core assets is also set to spur an earnings growth of 28 per cent CAGR (compounded annual growth rate) over FY20-21 with an underlying Ebitda (earnings before interest, taxes depreciation and amortisation) of Rs 10,000 crore growing at five per cent CAGR, a research report by ICICI Securities said.

For Tata Power, paring non-core debt is its core focus. As per the estimates of ICICI Securities, out of the the company's total debt of Rs 48,900 crore, Rs 11,500 crore is categorised as non-core relating to funding losses of Coastal Gujarat Power Ltd (CGPL), the special purpose vehicle formed for the now distressed 4,000-Mw ultra mega power plant (UMPP) at Mundra and also the premium paid for Welspun acquisition. Against this, Tata Power has planned assets sales and liquidation of regulatory assets to the tune of Rs 12,500 crore (excluding Tata Projects) which is expected to materialise over two to three years and will help in reducing the interest burden further.

According to the analysis by ICICI Securities, Tata Power's stock price correction by 24 per cent over the last one month seems over done as the company has managed to improve profitability in Q1 of FY20 by 40 per cent year-on-year (YoY) led by benefits of lower coal prices and better coal sourcing, leading to lower fuel cost under recovery at CGPL.

A separate report on Tata Power by Elara Capital shows the under recovery at CGPL in Q1 of this fiscal reduced by 40 paise per unit to 55 paise on higher blending of low GCV (Gross Calorific Value) coal, better discounts and lower fuel prices which are likely to sustain. A sizeable fall in prices of imported coal would help Tata Power reduce losses at Mundra, although at cost of declining profitability from Indonesia coal mines.

The Mundra UMPP has been an overhang on profitability and its resolution would be a key valuation trigger. “Post Gujarat government’s approval for tariff hikes, final judgment by CERC (Central Electricity Regulatory Commission) to Adani Power of tariff hike, there is high probability of Mundra tariff hike approvals by the states. On Mundra resolution, the Gujarat discom has approved supplementary PPA (power purchase agreement); other four states are expected to arrive at a decision”, Elara Capital noted in its report.

The matter is currently under consideration with CERC. A successful resolution plan could boost Tata Power, as Mundra losses have been a drag on overall profitability.

Elara Capital's report is optimistic on Tata Power's divestment of stake and monetization of non-core assets. The two measures, it believes would help de-leverage (debt-equity ratio) from 2.7 in FY17 to the current debt-equity ratio of 2.1 in FY19. The net debt equity ratio is estimated to go down to 1.96 in FY21. The report anticipates some stake sale in Tata Power strategic engineering division to Tata Advance Systems for Rs 1,200 crore with an enterprise value of Rs 2,230 crore. Besides this, there is a possibility of offloading of 4.7 per cent stake in Tata Communications to Tata Sons for Rs 1,500 crore and 40 per cent stake sale in Panatone Finvest to Tata Sons for Rs 600 crore.