Tata Power needs to shed asset overload to drive growth
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Saurabh Agrawal, the newly appointed group chief financial officer of Tata Sons Ltd who is known for his investment banking acumen, may find in Tata Power Co. Ltd an ideal candidate for a restructuring exercise.
Some investments that the Tata group firm made in the past have not been up to the mark and the increase in leverage on its books is threatening to cap its earnings potential. The company will benefit by exiting unrelated investments and monetizing its investments in the renewables’ business. Tata Power has made attempts earlier, but progress has been slow, which is testing investor patience.
The proposed stake sale in Indonesian coal miner Arutmin is pending for years now. The acquisition of Welspun’s renewable assets bumped up Tata Power’s net debt to Rs46,781 crore, pushing its debt equity ratio to more than three times.
The adverse Supreme Court ruling on the Mundra (Gujarat) power plant means that the unit will be neutralizing the benefits got from coal mining. With electricity demand remaining subdued and the company still figuring out ways to contain losses at Mundra, the plant’s cost under-recovery increased in 2016-17. The fear is Tata Power may get stuck in a low earnings growth situation, exposing itself to financial pressures. “Tata Power is facing slower growth in the regulated business, risk of expiry of generation PPAs (Trombay PPA), competition in renewable energy, and a highly leveraged balance sheet,” Motilal Oswal Securities Ltd said in a note. PPA stands for power purchase agreement.
The company aims to reduce its debt equity ratio to two times through stake sales in non-core assets. “Management explicitly stated that some monetization of noncore investments/assets will surely be done within FY18; however, it also stated that Tata Power is not looking to sell any stake in Tata Sons,” Nomura Research said in a note.
But the delays so far will make investors cautious. According to an analyst with a domestic broking firm, delays and lack of a clear road map on asset monetization—for instance, identifying assets to be sold—is generating little conviction, reflected in the 4.6% decline in the company’s share price in the last two trading sessions.
According to Jefferies India Pvt. Ltd, investor disappointment over delays in asset monetization was seen at last week’s analyst meet. Still, the management is exuding confidence on asset monetization, and most analysts are hopeful of a leaner balance sheet in the current fiscal year. Some are pencilling lower debt in their estimates. Any extended delays will trip them and anger investors further. “$400 million (Rs10/share) receipt from Arutmin coal mine sale is awaited and $170 million (Rs4/share) stake in listed Tata Communications and Tata Teleservices Maharashtra are potential upfront monetisation. We have factored these in our debt repayment and believe it is needed for the next leg of upside, apart from earnings growth delivery,” adds the Jefferies report.