Supreme Court tariff order reduces options for Adani, Tata Power
Mumbai: Following the Supreme Court’s judgement on Tuesday that disallowed Tata Power Co. Ltd and Adani Power Ltd from raising power tariffs to compensate for expensive imported Indonesian coal, the two companies are left with few options. Both companies will have to take measures to mitigate their losses to overcome the weakening of their finances, analysts said.
The two companies could likely look at cheaper fuel sources, maintain optimum generation to recover capacity charge without losing too much on fuel cost under-recovery, utilize the losses to set off against alternate income, and refinance debt, Kotak Securities analyst Murtuza Arsiwalla wrote in a report Wednesday.
The judgement is credit-negative for Tata Power but does not impact its Ba3 rating, Moody’s Investors Service said.
In Adani Power’s case, the order has allowed for “force majeure” benefits if it is related to Indian laws. The SC has asked the Central Electricity Regulatory Commission (CERC) to hear the matter and determine the amount of relief to power generators who have been hurt by changes in local laws.
Thus, Adani Power could seek relief for compensatory tariffs due to poor availability of domestic coal for sale of power from its Mundra plant to the state of Haryana; and for its Tiroda and Kawai plants that have used imported coal.
Adani Power and Tata Power did not respond to Mint’s queries sent on Wednesday. On Tuesday, Tata Power had said it would continue to work towards alternatives, including sourcing of competitive and alternative coals “to best contain the onslaught of under-recovery”. Adani Power had said it was yet to decide the further course of action.
While Adani Power has recognized compensatory tariff of Rs8,800 crore since FY13, Tata Power hasn’t. Thus, the judgement is negative for Adani Power and neutral for Tata Power, according to Rupesh Sankhe, analyst at Reliance Securities. Sankhe had told Mint on Tuesday that an option for Tata Power was to forego its equity of Rs4,000 crore in the plant and ask its lenders to come forward and take over the project.
“We, prima facie, envisage about Rs13-18 hit on Tata Power’s SOTP (sum of the parts) (Rs85) due to its inability to book any CT (compensatory tariff) which we have assumed at about 0.30 paise/unit from FY18, thus impacting the NPV (net present value) to the tune of about Rs35-50 billion. We await further clarity on the APTEL order for Adani Power (SOTP – Rs28),” Edelweiss Securities Ltd analysts Swarnim Maheshwari and Manish Saxena wrote in their report on Wednesday
The two power producers have long argued that a change in Indonesian regulations has pushed up their cost of coal imported from that country to fuel their electricity plants at Mundra, forcing the companies to seek a higher price.
Tata Power’s Coastal Gujarat Power Ltd (CGPL) unit and Adani Power both operate over 4,000 megawatt (MW) coal-fired project in Mundra, Gujarat, and have power purchase agreements with state discoms in Rajasthan, Gujarat, Haryana and Punjab.
In a major setback to Tata Power and Adani Power on Tuesday, the Supreme Court denied award of compensation on account of expensive Indonesian coal, setting aside an earlier tribunal ruling that had allowed the power producers to charge higher tariff.
The SC order is in contrast to a judgement by CERC in December that Tata Power and Adani Power were entitled to charge their customers more to recover the higher costs stemming from an increase in the price of imported coal by invoking ‘force majeure’.
Adani Power had recognized compensatory tariff of Rs14.6 billion for the first nine months of FY17 and Rs30 billion for FY16 against Ebitda (earnings before interest, tax, depreciation and amortization) of Rs54 billion and Rs85 billion, respectively, according to the Kotak report. “Tata Power, on the other hand, did not recognize any compensatory tariffs but had an average under-recovery of Rs9 billion or Rs0.5/ kwh for 9MFY17 against Ebitda of Rs5 billion,” it said.
Adani Power’s shares fell further on Wednesday, closing 9.01% lower at Rs33.85 on BSE. Tata Power’s shares closed up 0.06% to Rs85.45.
The firms’ shares could languish further as some of the projects would turn unviable, brokerage Sharekhan Ltd said in a note on Wednesday. The SC order could also impact sentiments towards public sector banks due to potential asset quality issues, the note said.