After Supreme Court order, Adani Power faces write-offs, restating accounts

Restructuring of power holdings likely

Adani Power faces write-offs, restating accounts and restructuring its power assets after the Supreme Court disallowed compensatory tariff for changes in international regulations.

“The company is exploring restructuring subsidiaries, so that all assets can be brought under the holding company,” said a person with knowledge of the development. An email query to Adani Power went unanswered.

Adani Power owns the 4,620 MW Mundra power plant, unlike other plants in Karnataka, Rajasthan, Jharkhand and Maharashtra, which are owned by subsidiaries. Adani Power has six subsidiaries.

“The idea is being considered, however, it is one of the many options being considered,” the source added.

Adani Power may have to act sooner on a write-off. The company has recognised Rs 4,400 crore as revenue from the Mundra project on account of compensatory tariff up to December 2016. This amount may have to reversed or 80% of it written off. 

According to analysts at Nomura, at least 80% of the compensatory tariff is attributed to changes in Indonesian coal pricing regulations.

Adani Power will also have to restate financial statements of previous years and inform the stock exchanges accordingly. This will widen the company’s losses, according to analysts.

“Another option available to Adani Power is refinancing debt in order to save on the interest cost. Adani Power may need to infuse more equity to maintain its debt-equity ratio as an erosion of net worth is likely with the write-off,” said an analyst with a brokerage firm who did not wish to be identified.

“The earnings downgrade is damaging in light of the leverage at Adani Power -- 400% financial leverage when compared to the equity capitalisation of the Adani group,” said Tim Buckley, director of energy finance studies of the Sydney-based IEEFA. 

“This raises the question whether Adani’s Mundra power plant will potentially end up as a $5 billion stranded asset,” he added. 

The plant’s long-term power purchase agreement is too low to allow a viable return. Given excess thermal power generating capacity in India, Mundra could see falling utilisation rates combined with expensive fuel and a non-commercial electricity offtake tariff, he said.

Tata Power, the other company affected by the Supreme Court’s ruling on Tuesday, may need to explore fewer options. Analysts at Ambit Research said Tata Power could look at sourcing domestic coal at competitive rates and selling power to merchant markets. 

The Supreme Court has referred the case back to the Central Electricity Regulatory Commission to quantify the tariff relief for plants that had to use imported coal due local shortages.

The Adani group’s Tiroda and Kawai projects have no local coal linkage and the interpretation by Rajasthan and Maharashtra regulators on non-availability of domestic coal as a "change in law” will be critical, according to Anirudh Gangahar and Archit Singhal at Nomura.

In their view, full recovery of the compensatory tariff -- Rs 3,300 crore has been recognised so far for the two projects -- is debatable. 

“Adani Power is likely to go back to the CERC for compensatory tariff at Tiroda and Kawai,” said an analyst with a brokerage firm who did not wish to be identified. 

However, analysts do not see much scope for compensatory tariff for domestic regulatory reasons.