Home >Markets >Mark To Market >Tata Power’s tough stance on Mundra plant does nothing to power up stock

Tata Power Co. Ltd’s threat to snap electricity connections from the loss-making Mundra plant if states do not revise tariffs did little to quell investor concerns. The stock continued to slip, hitting a new 52-week low last week.

The company warned about the potential fallout of the delay in raising tariffs. “Should compensatory-tariff approval from states be delayed based on cost-benefit analyses, it may perhaps be better to shut the plant down during April-June 2020," analysts at Antique Stock Broking Ltd said in a note presenting Tata Power management’s views after a conference call.

Graphic by Naveen Kumar Saini/Mint
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Graphic by Naveen Kumar Saini/Mint

Losses at the Mundra power plant in Gujarat have shrunk in recent quarters, reflecting the downtrend in fuel (coal) costs. But that brings little solace.

High electricity offtake in the summer months can vastly increase losses. As demand rose, Mundra power plant’s utilization increased from 78% in Q3 FY19 to 85% in Q4.

Even if state power distribution companies acknowledged the supply disruption threat, relief could be a long-drawn process. Of the five, only one state has so far agreed to a tariff revision.

Further, there is the question of the plant’s future. Finding long-term customers for a 4,000 megawatts plant is not easy. Meanwhile, Tata Power will have to bear the burden of the 15,000 crore estimated debt for the plant.

Progress elsewhere is mixed. While the acquisition and expansion of its solar power business are loading the company with debt, proceeds from asset sales are taking time to materialize. In the three years to 31 December 2019, consolidated debt fell a mere 4% despite exits from several investments.

Adding to concerns is the downtrend in coal prices. Tata Power has stakes in overseas coal mines. In the December quarter, gross profit per tonne dropped 32% from a year ago (Q3 FY19).

“Every 10% change in coal prices impacts earnings per share 6%, despite some offset at Mundra. We have realigned our coal-price expectations to reflect the year-on-year drop versus flattish to some rise we were expecting earlier," said analysts at Jefferies India Pvt. Ltd in a recent note.

The concerns are weighing heavily on the Tata Power stock, which is down 26% in the past one year. Continuing losses at the Mundra power plant, coupled with rising capital expenditure in new business ventures, will weigh on the company’s earnings, slashing return ratios.

“Tata Power’s return on equity (RoE) will be restrained at below 10% (6-7% in FY20-21) unless some resolution arises regarding Mundra, or all monetisation proceeds go toward debt reduction, with a cap on further capex," pointed out the Jefferies India report.

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