BackTata Power’s Welspun acquisition is EPS accretive
However, one worry for investors would be how will Tata Power, which already has a consolidated net debt of Rs38,600 crore, finance this purchase
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Tata Power Co. Ltd wants to increase the proportion of renewable energy assets in its portfolio to 40%. If it decides to build new solar power plants today, it can expect to spend ₹ 6 crore per megawatt (MW). So, at first blush, its deal to buy Welspun Renewables Energy Pvt. Ltd’s 1,140MW portfolio for an enterprise value of ₹ 9,249 crore, or ₹ 8.1 crore per MW, appears costly.
But Tata Power has argued that these are assets which are already generating cash and it doesn’t have to deal with headaches such as acquiring land and ensuring transmission capabilities. With this acquisition, its total renewables share doubles to around 2,200MW and a tenth of its overall capacity.
There are a couple of sweeteners as well.
One, these assets come with extra land of around 500 acres which can help Tata Power increase capacity when required.
Second, these assets have tied up long-term power purchasing agreements. The weighted average tariff of solar assets (including those under implementation) works out to ₹ 8 per unit, according to the management in an analysts’ conference. This is a good deal higher than current solar power rates of ₹ 5-5.5 per unit. Similarly, the wind assets have signed sale contracts at ₹ 6 per unit.
One worry for investors would be how will Tata Power, which already has a consolidated net debt of ₹ 38,600 crore, finance this purchase. The management said it will take on debt but didn’t elaborate on details apart from the fact that it will keep leverage under control with a debt-to-equity ratio under three times. At the end of fiscal year 2016, the company’s net debt-equity ratio was 2.2 times.
When fully operational and working at 20% capacity utilization (the norm for solar power plants), these assets will add around ₹ 1,600 crore revenue. With a better credit rating, Tata Power might also be able to squeeze a few more rupees by refinancing the ₹ 5,500 crore debt.
But the income of ₹ 1,600 crore is just 4.3% of Tata Power’s consolidated revenues for FY16. At an indicative return on equity (ROE) of close to 15%, these assets might not move the needle much in terms of the company’s overall earnings trajectory, even if it’s value accretive.
Thus, investors may not be all that excited by the deal, especially since the Tata Power stock has run-up quite a bit in recent times after the Appellate Tribunal ruling said its Mundra plant will be compensated for some part of its under-recoveries.
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