Tata Power, the country’s third largest power company, has seen its debt grow as it borrowed to fund expansions and to acquire coal assets in Indonesia to secure fuel supplies. Its debt has quadrupled from ₹9,114 crore as on March 2008 to ₹35,177 crore in March 2014.

The company is, however, taking various measures to reduce its leverage and finance cost. The recent rights issue and divestment of its holding in one of its coal assets in Indonesia, PT Arutmin, will help bring down debt.

“After sale of Arutmin mines and also the rights issue that we did and our internal generation, the debt-equity ratio will come back to what was the normative debt-equity ratio. We do not need to do any other selling,” said Anil Sardana, CEO and MD, Tata Power.

As Tata Power took on debt, its debt-equity ratio went up from 1.2 times as on March 2008 to 3.3 in March 2014. A portion of the debt was used to fund remunerative operations.

These include its Mumbai operations (generation, transmission and distribution), power distribution in Delhi and the 1,050 MW Maithon plant, all of which earn regulated tariffs that allow complete cost pass-through plus an assured return.

The Mundra drag A large part of the borrowings was used to set up the ₹18,000-crore Mundra ultra-mega power plant in Gujarat, which accounts for almost half the company’s installedcapacity.The plant, which runs on imported coal, became unviable following a change in Indonesian laws in 2011, which raised the cost of imported coal. With Tata Power having asked only for a partial pass-through of fuel costs when it bid for the project in 2007, the plant turned unviable, forcing it to book an impairment charge of ₹1,800 crore and ₹850 crore in 2011-12 and 2012-13 respectively.

Tata Power was coasting along well up to 2010-11, after which troubles started. Even as its revenues grew from ₹19,451crore in 2010-11 to ₹35,649 crore in 2013-14, the revenue increase did not keep pace with the rise in costs, dragging the company into the red in the last three years. The 4,000 MW Mundra plant, commissioned between March 2012 and March 2013, was the biggest drag on consolidated operations. Falling profits from the coal business in the last two years, pressured by weak global prices, did not help either.

With interest costs spiralling from ₹866 crore in 2010-11 to ₹3,440 crore in 2013-14 and profit (before interest and tax) rising only modestly, Tata Power’s interest coverage fell sharply from 4.6 times to 1.3 times.

Tata Power’s debt levels are expected to ease from here on, thanks to coal asset sales and funds raised through a rights issue in April.

Stake sale proceeds According to the company: “The rights issue offering had laid down four purposes, of which ₹1,173 crore has been earmarked for debt repayment of Tata Power and its subsidiary Coastal Gujarat Power. In addition, ₹498 crore was earmarked for General Corporate Purposes (GCP). The GCP amount can be used for various purposes including repayment of short-term and long-term loans.” Besides, the Arutmin stake sale is expected to fetch $510 million (about ₹3,000 crore) once the transaction is completed. Together, these two can help Tata Power bring down its debt-equity ratio to around 2.4.

In March, Crisil revised its outlook on the debt instruments and bank facilities of Tata Power to stable from negative and reaffirmed the rating at CRISIL AA-.

Tata Power is also evaluating options for sale of non-core investments. “We have non-core investments and we keep making that point, time and again, that whenever the time is right for us to dispose of non–core investments we will do so,” said Anil Sardana.

This is a part of a series on how companies are managing debt to gear up for better times.

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