Even with the best hedging strategies, sometimes risk can’t be eliminated completely. In the case of Tata Power Co. Ltd, it is the regulatory risk that is the issue.
While many of its peers are scrambling for coal, the company has tied up fuel supplies, even acquiring a 30% stake in two Indonesian mines four years ago when it was not fashionable to do so. But the Indonesian government threw a spanner in the works when it announced that it plans to set a minimum price for coal exports.
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That will directly affect the Mundra ultra mega power project, the first phase of which will be commissioned by September. One quarter of fuel supplies for that project will come from Indonesia. While this has been in the air for some time, the management highlighted its importance in a recent conference call. Tata Power said if it couldn’t get exemption from Indonesia, then coal prices for Mundra could go up by $30 (around Rs1,340 today) per tonne.
Yes, part of this loss could be compensated by the additional dividends the company will get from its interests in the Indonesian coal mines. But brokerages reckon that it could still haunt the company over the near term.
India Infoline Ltd estimates that this could set back cash flows over the next four years by as much as $400 million, almost equalling Tata Power’s consolidated net profit for fiscal 2011. JPMorgan India Pvt. Ltd reckons this would lead to a slippage in profit by 8% over the next couple of fiscals.
This loss of competitive advantage over its private sector peers perhaps explains why the stock has underperformed both the BSE Power and BSE-100 indices of the Bombay Stock Exchange since the beginning of this fiscal.
Not that its fourth quarter profit was impressive. Sure, profit after tax grew 15% over a year ago after adjusting for one-time items such as forex gains and reversal of deferred tax provision last fiscal. But then, power generation income is not growing fast enough. Electricity generated on a stand-alone basis fell 7% as other power producers were able to sell at a cheaper rate and the company could not produce at the desired capacity due to a shutdown at one of its plants. Even the coal business saw a decrease in volumes by 12% despite an increase in realizations.
Tata Power plans to add about 2,800 megawatts of capacity this fiscal; that’s about 80% of the existing capacity. While that’s no doubt a positive, it has been factored in the price as the firm is on schedule. That means Indonesian coal contracts remain the near-term trigger for the stock.
Graphic by Yogesh Kumar/Mint
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