Tata Power has been a turnaround story in the making for the past two years. Last year, the company announced that it would exit non-core businesses and focus on its core power generation, distribution and transmission businesses. Tata Power has faced several speed-limiting problems: its turnaround has been a work-in-progress for nearly two years.

Over the past 20-21 months, the company’s stock has been up and down. The resolution of the compensatory tariff issue at its Mundra thermal power plant subsidiary Coastal Gujarat Power (CGPL) has been an albatross over Tata Power’s stock price. But recently, it appears that this overhang might be disappearing as the stock has seen a move upwards since the lows of Rs 27 apiece that it touched in May 2020.

In the last four years, the company has gone from being a Nifty 50 stock to a mid-cap stock because of the troubles faced by its Mundra power plant, and the resultant debt burden. The company has tried to address some of these problems to turn the corner.

Quick Takes

• Tata Power plans to bring down its net debt to Rs 25,000 crore by March 2021 by selling non-core assets and businesses, including sale of renewable assets to an InvIT

• New investments will only be in renewable energy and the company also plans to slowly phase out thermal capacity

• Orissa discom CESU’s turnaround is underway and the company expects to achieve targets within 12-15 months

• Mundra thermal power plant’s under recoveries have reduced considerably due to benign coal prices

Mundra Overhang Recedes

The company’s management said that considering benign coal prices across the world, the under recovery of fuel costs at Mundra will not impact the company too much, even if there is no relief given by the Central Electricity Regulatory Commission.

Tata Power also owns some coal mines through CGPL, which is supposed to help it offset the impact of any rise in prices of coal. Also, over the past couple of years, the company has tried to blend lower grade coal to reduce the cost of fuel, and as a result reduce the under recovery on account of fuel cost at CGPL.

As a result, the under recovery of fuel cost at CGPL is headed in the right direction, and has consistently been going down. It was Rs 0.30 per unit of electricity sold to discoms at the end of September 2020 quarter. To get a sense of how benign this under recovery of fuel cost has become for CGPL, for FY19, the under recovery was Rs 0.84 per unit. This under recovery at the end of the September 2019 quarter was Rs 0.52 per unit and at the end of the June 2020 quarter it was Rs 0.46 per unit.

Tata Power has started the process of merging CGPL with itself, which could give some synergies in terms of taxation and interest cost for the subsidiary.

Debt Reduction and Divestment

Tata Power is targeting a net debt level of Rs 25,000 crore by the end of FY21, which is an ambitious target (net debt is calculated as total debt less cash and cash equivalents.) As on March 31, 2020, Tata Power’s net debt was Rs 43,578 crore. This has come down to Rs 36,480 crore as on September 30, 2020.

The company has also repaid debt worth Rs 2,600 crore of CGPL in October 2020, and was slated to repay another Rs 1,500 crore in November 2020.

The divestment of its defence subsidiary Tata SED to group company Tata Advanced Systems earned it Rs 539 crore net of debt. There are also plans to sell assets and business in Africa, a coal mine in Indonesia, Tata Projects, among others. The sale of non-core assets is expected to fetch around Rs 4,500 crore in FY21.

The company also plans to hive off its renewable power projects into a private unlisted Infrastructure Investment Trust or InvIT by the end of March 2021. Nearly 30% of Tata Power’s total installed capacity of 12.7 GW is made up of renewable power. This is expected to free up some cash to invest in newer projects. 

In the future, Tata Power plans to use the InvIT route to raise cash (to be reinvested in the business) by hiving off its renewable assets. It currently has 1.2 GW renewable projects under implementation. 

The company’s Solar EPC business has a large order book of 2.2 GW, out of which around 25% is expected to be commissioned within FY21. This is worth nearly Rs 8,700 crore. This business earns the company margins in the high single digits in percentage terms.

Business is looking up

Reflecting the uptick in its various businesses across the power value chain, Tata Power’s net profit has been trending upwards, despite the COVID19 shock witnessed in the first quarter of FY21.

The Solar EPC business and the lower under recovery of fuel costs at CGPL aided revenues and profits during the September quarter. The increase in revenues in YoY terms was also because the plant load factor or PLF (proportion of total installed capacity generating power) of its plants rose to 79% compared to 65% a year ago.

The company is on track to turn around CESU, a Orissa state power distribution company (discom) it picked up 51% stake in, ahead of time. This should help its bottom line. It has also won bids for three other discoms in Orissa, for one of which it was the only bidder. The state government is pondering whether it should call for bids again for the project. For the remaining two projects, Tata Power is waiting for the letter of award. It is eyeing privatisation of many state and union territories’ discoms to grow the power distribution business.

Ratings agency CRISIL has upgraded its long term credit rating on Tata Power and its subsidiaries to AA with a ‘Stable’ outlook from AA- with a ‘Positive’ outlook. ICRA has revised its outlook for Tata Power’s long term rating (AA-) to ‘Positive’ from ‘Stable’.

Right now, Tata Power’s turnaround story hinges on successful timely completion of its merger of subsidiaries with itself, and its divestment of solar power assets into the InvIT by March 31, 2020. Promoter Tata Sons infused Rs 2,600 crore into the company through a preferential issue of shares recently. This fund infusion, along with its divestment program, is expected to help Tata Power invest in future growth and pay down its debt.