Yassir A. Pitalwalla and Shilpa Shree
Tata Power, which on Friday announced that it would acquire two coal mining companies and a coal marketing company in Indonesia, will pay for the acquisition by infusing $400-500 million (Rs1,720-2,150 crore) as equity in a Mauritius-head-quartered special purpose vehicle. The SPV will, in turn, raise the $1.1 billion required for the 30% stake in the three firms the Mumbai-based power company is buying from PT Bumi Resources Tbk.
Confirming the investment in the SPV, Prasad Menon, managing director, Tata Power Company Ltd (TPC), said, “The final funding pattern will be finalized over the next couple of months.”
On the strength of its equity (the money being invested by TPC), the SPV will borrow money from banks; it will also mortgage shares it is acquiring in PT Kalim Prima Coal and PT Arutim Indonesia, the two mining firms. The SPV will also hold a 30% stake in Enercop Ltd, a coal marketing company.
“The SPV will raise non-recourse debt to fund the balance requirement of funds ($600-700 million),” said Menon. That means the repayment of the loans and the interest on the loans raised by the yet-to-be-named SPV will not be guaranteed by India’s largest private sector power utility.
Tata Power plans to almost quadruple its generating capacity over the next five years, from 2,323MW to 9,323MW, but it needs fuel to do this. The company should have no problem finding buyers for the extra power, according to report from Macquarie Securities (India) Pvt Ltd, a brokerage, that says India “is estimated to need 100,000MW of new generation capacity by 2012 to plug existing shortfalls and satisfy prospective demand.”
However, “TPC’s mega buy is expected to lead to a decline in earnings per share in the first year or two, although it will help boost earnings thereafter,” admitted S. Ramakrishnan, executive director (finance), TPC. “The expansion plan, which will be implemented over the next five years, will cost around Rs28,000 crore ($6.44 billion),” he added.
TPC had cash and cash equivalents of its books on 31 March 2006 (the latest balance sheet available is for that date), and a cash flow of around Rs590 crore according to Reuters. Given these numbers, and the size of the deal, the company had to look at other sources of funding and other structures to complete its large acquisition.
Raising funds in a cost-effective manner will be a challenge for the 96-year-old company. Leading brokerages such as Enam Securities have branded the stock an ‘under performer’ while Citigroup and Pioneer Intermediaries have put out a ‘hold’ recommendation on it. Domestic mutual funds have been net sellers of the stock since November ’06. The stock closed at Rs509.45 on the Bombay Stock Exchange (BSE) on Friday, 30 March (down 0.18% in a market that rose 0.71%).
Over the past year, the stock has fallen 11%; BSE Sensex, the 30-stock benchmark index of BSE, has gained around 16% in the same period. “The company may not get any returns from the $3.8 billion Mundra ultra- mega-power project for the next four years till commissioning. Further, the upside in the project seems limited while there does seem to be some downside; there is no cost pass through mechanism in the price per unit at which the power is to be sold,” said the chief investment officer of a leading mutual fund who requesting anonymity.
Tata Power’s deal with Bumi Resources is partly driven by the company’s need to find low-cost fuel for its Mundra project, which it won by quoting a per-unit tariff of Rs2.26 (as against an average of Rs2.9 from existing projects).
Under the terms of the deal, Tata Power gets to buy 10 million tonnes of coal a year from the Indonesian mines starting 2011, around the time the Mundra power plant starts producing power.
Menon said that coal prices have gone up 40% since 2002-03 and that the deal with Bumi ensures a long-term supply at a benchmarked indexed price that is in keeping with the coal-cost estimates made in the bid for the Mundra project.
“The Mundra project will require 11-12mt per annum of coal. We expect to use around 5.5-6mt per annum of the Indonesian supplies for this project and the balance for planned capacity expansions in Trombay of two 250MW power projects and a 2,400MW power project in coastal Maharashtra,” said Ramakrishnan. And Menon added that the balance coal needed for Mundra would come from other long-term supply contracts and spot-buying contracts. “There is no point in putting all our money in equity (stakes in coal mines),” said Menon.
Raising debt for all these projects at attractive rates will be a challenge. Interest rates have risen to a four-and-a-half-year high in India. And the company’s highest safety ratings that allow it to borrow at the lowest cost possible have been put under watch by two of India’s credit rating agencies ICRA Ltd and Crisil Ltd. Analysts believe a downgrade is imminent.
Ramakrishnan admits that such a downgrade could make fresh borrowings more expensive. And borrowing from the international market won’t be easy because credit rating agency Moody’s Investors Service has put the company’s ratings on review for downgrade. The current credit rating is just one level below investment grade.