Tata Power Co. Ltd’s stock gained 3.41% on Monday after reports that the Delhi electricity regulator cleared a 22% tariff hike effective September. Tata Power’s unit North Delhi Power Ltddistributes power in that state. The increase in the price of the stock is just a tad more than that in the broader market.
The reason why investors aren’t jumping up in joy is because this tariff hike is unlikely to affect Tata Power’s profit and loss account much, even if this business accounts for nearly one-tenth of the company’s profit. Remember that Tata Power distributes power in Delhi through a regulated model that allows for passing through costs. The last tariff hike in that state happened two years ago; meanwhile, maintenance and personnel costs have jumped.
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Note also that Tata Power has already booked this income under receivables. Brokerage India Infoline Ltd estimates that these unrecovered costs are the reason why the distributor’s working capital worsened to Rs 2,400 crore at the end of March, double than that a year ago. So the hike in effect is a recovery of dues, although it will help improve the company’s cash flows while easing up the pressure on interest payment.
Still, the decision couldn’t have come at a better time for the company’s distribution business. Tata Power also sells power in Mumbai, where a majority of customers are those who have shifted from Reliance Infrastructure Ltd, the other distributor. Now, the state electricity regulator has decided to levy a cross-subsidy surcharge on these consumers. While the precise levy is still being worked out, it may reduce the rationale for shifting to Tata Power, JPMorgan India Pvt. Ltd said in a note, where it cuts the valuation of this business.
However, the distribution business is accorded some 5-6% weight by brokerages in computing the stock’s value. The key reason why the stock is still hugging the BSE Power index, despite decent profits in the June quarter, is because of the Mundra Ultra Mega Power Project. Later this week, Indonesia shifts to a new pricing system for coal exports that will hit many power producers in India. Since there is only a partial pass-through of costs allowed in Mundra, Tata Power could bleed up to Rs 500 crore annually when it commissions the project later this year, JPMorgan estimates. This is despite Tata Power having a hedging strategy in place that includes a stake in a couple of Indonesian mines.
No wonder, at Friday’s annual general meeting, chairman Ratan Tata talked about looking abroad for further business in the power sector.
Graphics by Ahmed Raza Khan/Mint
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