Tata Power’s transformation plans sound grand, but face many tests
There are doubts if the company can scale up its renewable energy biz within the stipulated time at higher tariffs
Shares of Tata Power Co. Ltd gained 8% on Thursday after the company unveiled a five-year plan aimed at improving return ratios and reducing dependence on the legacy business. By FY25, the company plans to double its revenue, triple profits and drive up the languishing return ratios as the accompanying chart illustrates.
What’s more, the company plans to achieve this keeping its leverage in check. In fact, it aims to bring down the net debt from about ₹40,000 crore at the end of June to ₹25,000 crore by April 2021 and maintain it at those levels. All of this sounds grand, but the proof of the pudding will be in its eating.
The debt reduction is premised on the sale of non-core assets, fund infusion by promoters and establishing an infrastructure investment trust (InvIT) for renewable energy assets. The good news is that the company has made progress on the first two. It aims to complete the InvIT in the current fiscal year, which alone can take away ₹11,000 crore of debt from Tata Power’s books.
Upon the launch of the InvIT, Tata Power plans to add assets to this platform, releasing capital for other growth initiatives.
It aspires to increase revenue from renewable energy five-fold by FY25, by scaling up the rooftop solar, solar pumps and micro-grid businesses, and the engineering procurement construction (EPC) business in this segment.
Through this, Tata Power aims to reduce the share of the troubled Mundra power plant in its overall capacity and, instead, increase exposure to regulated businesses, where returns are assured.
But achieving this massive change will not be easy. Many doubt if Tata Power can scale up its renewable energy business within the stipulated time and that, too, at remunerative tariffs, since competition in the segment is intense.
Also, states are reluctant to add capacity additions at a large scale owing to their financial constraints. Annual solar installations have dropped for two consecutive years and they are projected to fall in 2020 as well.
Further, timing the InvIT launch and capital release with the company’s capex needs is easier said than done. “A huge chunk of the funding would come from asset recycling (InvIT) and may carry risk of timing mismatch," IIFL Securities Ltd analysts said in a note.
“We believe Tata Power should focus on its core business (generation/transmission/distribution) versus tiny gains from allied segments (solar EPC, pumps, etc), which entail perils of hyper competition and add no material value," added the IIFL analysts.
Still, the shift in strategy can result in some gains. But what is also needed is a favourable resolution to Mundra power plant’s woes.
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