Shares of Tata Power Co. Ltd and Adani Power Ltd rallied 8-10% on Friday after the Gujarat government submitted a report to the Supreme Court, suggesting relief for companies running imported coal-based power plants.

A rise in imported coal prices due to a change in the law in Indonesia had rendered these plants unviable. The companies had sought remedies, but the Supreme Court had denied relief, upholding the contractual obligations.

Now, in a reversal of sorts, Gujarat, which is a large buyer of electricity from these plants, has approached the court seeking a redressal mechanism. A Business Standard report said that other buyers, such as Punjab and Haryana, are yet to give consent to the report’s recommendations. Much, therefore, depends on reconciliation efforts and the legal outcome.

Even so, the development is to be seen in a positive light. That a lead buyer of electricity from the affected plants is agreeing to provide relief gives a leg-up to companies asking for remedial measures. Even a no-loss, no-gain outcome on a prospective basis will bring huge relief. The plants are losing money due to cost under-recoveries, so much so that Tata Power’s troubled Mundra plant was not even able to earn sufficient money to service its debt last fiscal year. The company as a whole is absorbing the losses.

As a consequence, analysts ascribe negative value to the project when valuing the stock. This will change if a potential resolution helps the project break even.

“In our current valuations, we ascribe a negative value of 45/share to the ultra-mega power project (equivalent to external debt in the absence of any EBITDA). Assuming the entire under-recovery is arrested, we estimate the value of the project to be 5/share (swing of 50)," analysts at SBICAP Securities Ltd said in a note on Tata Power.

Ebitda is earnings before interest, tax, depreciation and amortization.

The Tata Power stock closed at 68. 85 on Friday.

Similar calculations for Adani Power are not immediately available. But the development bodes well for stressed thermal plants. It comes amid a tightening demand-supply situation. A spike in coal prices has led to frequent curtailment of generation at plants that use imported coal. As a consequence, state utilities are forced to buy electricity in the spot electricity markets, driving up prices.

With domestic coal supply lagging demand, thus limiting fresh large-scale electricity generation, states cannot afford to let go the existing plants—both Tata Power and Adani Power had offered to hand over the troubled plants to Gujarat utilities, and expressed their inability to continue to absorb the losses.

So even as the earlier Supreme Court judgement upheld contractual commitments, faced with the harsh alternative of disruptions in electricity supply, Gujarat is seeking remedial measures, which is a good sign for both the affected plants and the sector.

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