Tata Power fights Mundra drag

Tata Power reported a consolidated net loss of Rs 260 crore in the last financial year, its second highest in the last 10 years. Also its consolidated debt at Rs 40,173 crore, 3.24 times its net worth, was the highest in more than a decade.

In fact Tata Power would rather want to forget the past three years of its century-old existence. "We should be closing this year at a debt-equity ratio of 2.6," said Anil Sardana, managing director of Tata Power, in a recent interaction, displaying a resolve to fight back.

His confidence stems from an agreement to sell a five per cent holding in Indonesian mines KPC in July for $250 million (Rs 1,500 crore). Tata Power bought a 30 per cent stake in two Indonesian thermal coal producers, PT Kaltim Prima Coal (KPC) and PT Arutmin Indonesia (Arutmin), and the related trading company owned by PT Bumi Resources (Bumi) in early 2007 for Rs 4,740 crore. According to analysts, the remaining 25 per cent stake in the coal mines is valued at a little over $1 billion (Rs 6,000 crore). And Tata Power has kept its option to divest open. "We invested not for the purpose of investment but for securitisation of coal and to get fuel at a discounted price," said Sardana. The company has been in a financial storm as its biggest single investment of about Rs 18,000 crore in the 4,000 Mw Mundra Ultra Mega Power Project (UMPP) has not played to script. This project makes up about half of Tata Power's 8613 Mw domestic power generation capacity.

When the company won the bid to develop the Mundra UMPP based on imported coal, this was supposed to free Tata Power from the constraints that capped returns from its bread-and butter-power distribution and generation business in the Mumbai region.

The company was hoping to earn better returns from Mundra through economies of scale and energy-efficient supercritical technology. It had bid aggressively, promising to supply power at a levelised tariff of Rs 2.26 a unit. In comparison, NTPC, the country's largest operator of coal-fired plants, sold power at an average of Rs 2.66 a unit in 2011-12. The government had allowed imported coal-based power plants as local supply of coal was not able to meet demand. Tata Power's calculations were based on its plans to import coal from Indonesia when international prices were around $40 in 2006. It then bought a 30 per cent stake in the Indonesian coal producers, KPC and PTA, in March 2007. But global coal prices surged past $100 a tonne in 2011 and the Indonesian government banned exports below a notified price from September 2011. This made import of coal unviable for Tata Power and Mundra project is now unable to make operational profit.

The natural hedge worked well for Tata Power as long as prices were high despite the fact that Mundra's losses were also high. If the cost of mining was $45 per tonne and the price of coal was $105 then the mines had a $60 margin. After taking care of taxes before the new law came into force, Tata Power used to get 30 per cent of that as margin. Net of that was about $10 a tonne, which was taking care of a large part of Mundra's losses.

Now, coal prices have come down to $70 and with $45 as cost of mining the $25 margin after taking care of taxes in hand comes down to $1-2. That is nothing compared to the $25 above the quoted price that Mundra has to pay. While the pain continues at Mundra, lower coal prices are an advantage in the sense that its losses may come down to about Rs 1,250 crore in the current fiscal from Rs 1,800 crore in the previous year. Although the Deepak Parekh-led committee had cleared a proposal to increase the Mundra tariff, the matter is now pending in the court.

The Mundra drag is reflected on Tata Power's stock price which at Rs 81 on Tuesday on the BSE was a mere 7.5 per cent up in a year. Sensex the benchmark index of the exchange was up by 30 per cent to 26,272 in the period. This indicates how the company has missed out on the current rally.

Stocks of peers Torrent Power, JSW Energy and Adani Power have, respectively, gained 86 per cent, 57 per cent and 43 per cent in this period.