Uncertainties mount for Tata Power

Tata Power's 4,000-Mw Mundra project (set up under Coastal Gujarat Power Ltd or CGPL), which accounts for almost half of its total power generation capacity, has become a key overhang on the financial performance.

Tata Power’s December quarter net loss of Rs 329 crore was largely due to a Rs 600-crore impairment charge relating to the Mundra project. Beyond Mundra, though, the company has done reasonably well with 35 per cent growth in consolidated revenue led by higher volumes in coal and power business.

However, issues relating to Mundra and Maithon power projects remain key worries. Analysts believe that these issues may not resolve in a hurry and thus could continue to have a bearing on share price and financials of Tata Power. In terms of valuations, too, at Rs 97, its stock is trading around 18 times earnings and 1.8 times book value based on FY14 estimates, wherein the risk-reward is not favourable.

Tata Power recently commissioned the fourth unit (800 Mw) at its Mundra-based ultra mega power project (UMPP) taking the company’s total capacity to 7,700 Mw.

While Tata Power has managed to commission the units before schedule, this project has suffered due to higher fuel cost of about Rs 2 per unit. The company’s realisation or tariffs at Rs 2.45 per unit have not been enough to cover fuel and other costs leading to under-recoveries of Rs 0.50 per unit. The management had earlier said that a 40 paisa per unit hike in tariff will help the project break even, while a 65 paisa per unit increase in tariff will ensure reasonable returns.

 

In the December quarter, thus, the Mundra project posted a net loss of Rs 829 crore on revenues of Rs 799 crore. The company has already written off Rs 1,800 crore of losses in FY12. Along with current year write-offs, accumulated losses of CGPL stand at over Rs 2,500 crore.

“Loss in CGPL is mainly due impairment of Rs 600 crore and under-recovery of fuel costs, reducing margins and making operating profit inadequate to cover interest and depreciation,” said the company in a statement. What’s more, with Mundra’s fifth unit (total five units of 800 Mw each) expected to be commissioned in the current quarter, the losses could mount further given the under-recoveries.

 

Besides Mundra, the 1,050-Mw Maithon project, too, has contributed to losses of Rs 74 crore in the nine months period ending December 2012. Lower power offtake, higher transmission charges and lack of sufficient transmission capacity have led to the losses.

“This was mainly because of a PPA for 300 Mw at Maithon, which was supposed to be signed with Punjab, was withdrawn during the quarter by the state electricity board,” says Rahul Modi of Antique Stock Broking.

Pressure also emanated from the coal business (27 per cent of consolidated revenues). Despite a 27 per cent increase in coal production to 22.9 million tonnes, the business suffered due to falling realisation at $71.6 a tonne compared to $95 a tonne a year ago.

Going ahead, while Tata Power is negotiating a tariff hike for Mundra as well as the issues regarding the Maithon project with the central electricity regulator, only a favourable outcome will help improve sentiments. A recovery in global coal prices could also act as a positive trigger. Positively, its sturdy power generation and distribution businesses in Mumbai and Delhi and robust cash flow from coal business limit the downside for the stock.