'Coal asset transfer might save Tata Power Rs 180 cr a year'

Tata Power's decision to transfer a 75 per cent stake in its Indonesian coal assets to the loss-making Mundra power project might not help bridge its cash flow gap. However, an analysis by Credit Suisse says through the next four years, the move could help the company save Rs 140-180 crore a year in tax.

Tata Power decided to transfer the coal assets to the Mundra project after the project's fuel costs rose, owing to changes in Indonesian coal export laws.

The coal assets held by Tata Power under Bhira Investments provide dividends to the company. Dividend income is liable to be taxed at 15 per cent. Including surcharge and education cess in India, the effective rate is 17 per cent.

"Tata Power now plans to transfer at least 75 per cent of its stake in Bhira Investments to CGPL (Mundra). This should allow the dividend income received from Bhira Investments to be offset by CGPL's losses, resulting in no taxes," the Credit Suisse report said.

Tata Power did not comment on this analysis.

Despite an asset transfer, the Mundra project is likely to face a cash flow gap of about Rs 3,700 crore between 2011-12 and 20016-17, the report said. It added this might be insufficient to service its debt, at least in the initial years.

The stock was downgraded to from 'neutral' to 'underperform'.

In the quarter ended December, Tata Power made a Rs 600-crore provision on possible losses from the Mundra project. This is in addition to the Rs 1,800-crore hit it took last financial year.

Tata Power and Adani Power have sought the Central Electricity Regulatory Commission (CERC)'s approval to help pass on increased fuel costs to power purchasers, by allowing renegotiation of their contracts.

Credit Suisse believes an early resolution to this issue is unlikely. When a resolution comes about, Tata Power's valuation could increase 13-76 per cent, Credit Suisse estimates. "CERC's judgement is likely to be litigated by stakeholders. This implies an early resolution on this issue is unlikely. We thus recommend investors sell the stock on a likely rally, led by a positive ruling from CERC," the report said.

On Tuesday, the Tata Power stock fell three per cent to close at Rs 97.9 on the BSE.