Signage for Tata Power Co. stands in Jamshedpur. (Bloomberg )
Signage for Tata Power Co. stands in Jamshedpur. (Bloomberg )

For Tata Power, debt reduction is as tricky as Mundra resolution

  • With Gujarat, a large buyer of power from the plant, agreeing to revise tariffs, analysts see others follow suit
  • Not surprisingly, investors are unimpressed with the progress

Reports that Tata Power Co. Ltd is looking to place its renewable energy assets in an infrastructure investment trust (InvIT) to pare debt brought limited gains to the stock. The company’s shares have risen only 1.6% so far this week.

An InvIT can reduce Tata Power’s consolidated debt by 9,500 crore, lowering the net debt-to-equity ratio to 1.5 times, show calculations by SBICAP Securities Ltd. A fall in debt and leverage will create headroom for fresh investments, opening growth avenues for the company.

Even so, the limited gains in the stock underscore investors’ scepticism. The company has had little success with its divestment plans till now. It has been trying to lower debt through the sale of non-core investments and asset monetization for some time. But consolidated debt has remained unchanged at around 48,500 crore for three years now.

In the FY17 annual report, Tata Power highlighted the need for deleveraging, saying “initiatives will be undertaken with the objective of achieving an optimum debt-to-equity and debt-to-Ebitda ratio while at the same time providing enough headroom for capitalizing on growth opportunities. Your Company is actively pursuing steps needed to achieve this objective in a time-bound manner".

The company did sell certain non-core assets in due course. But as can be seen, the measures had limited impact on its consolidated debt.

“Overall debt has remained at similar level over the past three years. While the company has been divesting stakes in some of the non-core operations, this has not aided overall debt reduction," Edelweiss Securities Ltd said in a note.

Not surprisingly, investors are unimpressed with the progress. The stock is down 8% in the past three years, compared with a 41% rise in the Nifty 500 index.

Much of the underperformance can also be attributed to the delay in the resolution of the loss-making Mundra ultra- mega power project. Continued losses at the plant are weighing on Tata Power’s earnings and return ratios. With a large buyer of electricity from the plant, Gujarat, now agreeing to revise tariffs, analysts expect other state utilities to follow suit. This may well be a milestone moment for the company, as it can end the plant’s cash burn.

Of course, it remains to be seen what kind of relief state utilities agree to provide for the Mundra power plant. This, combined with the progress on balance-sheet deleveraging, will determine the quantum of returns for the Tata Power stock in the near term.

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