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Coal prices, Mundra plant key for Tata Power

Tata Power Co. Ltd’s earnings growth outlook over the medium term is wholly dependent on two things—how global coal prices move and whether there is clarity on the compensatory tariffs it will get for the Mundra power plant.

While the appellate authority on electricity had awarded Tata (and Adani Power Ltd) a compensatory tariff for its imported coal-based power plant, the Supreme Court has asked the tribunal to revisit the issue. If Tata had chosen to book the tariff (which it has not), its September quarter revenue would have been boosted by another Rs.164 crore, which would have flowed straight to profits.

The Mundra subsidiary posted a net loss of Rs.274 crore in the September quarter. However, it needs to be noted that even after accounting for the compensatory tariff, the plant would have made losses of 21 paise per unit of electricity sold during the quarter. Continuing losses at this plant have forced the company to provide Rs.2,650 crore as impairment charges over fiscals 2012 and 2013. The quantum of compensatory tariff and its time of implementation thus remains a huge shadow over Tata Power’s earnings.

Mundra is all the more important since it makes up for 47% of the company’s current installed capacity. The majority of its other power businesses are regulated assets and typically operate in a steady state but for minor variations quarter to quarter. Note also that Tata Power has only 800 megawatts (MW) capacity that will come up over the next four-five quarters or so. Some 9,100MW worth of capacities are under development, which means they will likely take at least two years to completion. So, for the next two years, revenue and profit growth will depend to a large extent on Mundra.

At the same time, the company will also possibly have to spend more on getting coal mines afresh after the Supreme Court’s recent de-allocation order. Cash flows would ease to the extent that the company will book sales of its Arutmin coal mine by the end of this fiscal, which will also reduce balance-sheet stress. In that context, the prices of international coal remain a key trigger for the share price, but the general decline in commodities is not helping. Net revenue per tonne was $47.2 in the September quarter, compared with $55.2 a year ago. While it was better than the June quarter numbers, production and sales were lower. Thus, coal earnings before interest and tax (Ebit) fell 26% from a year ago, hurting profits. This segment accounted for close to a quarter of Tata Power’s revenue and pre-tax profits in the previous fiscal and a recovery in global coal prices remains crucial to its fortunes.

Source: Live Mint