Loss concerns overdone for Tata Power

‘Impairment charges' of Rs.823 crore and foreign exchange losses were mainly responsible for Tata Power slipping from profits into losses in the latest September quarter. However, impairment charges may not be a major cause for concern for investors going forward.

The charges relate to its stake in the 4,000-MW Mundra Ultra Mega Power Project (UMPP). The impairment essentially means that Tata Power is writing down the value of revenues and earnings it expects from this project in future years.

Why impairment?

The Mundra power project uses coal imported from Indonesia, where mining laws have recently been changed to hike the price of coal exports. The new law benchmarks all exports to market prices while the Mundra project had earlier locked in a portion of its offtake at a fixed price.

As the power producer is locked into fixed tariffs for the power it produces, the increase in coal prices is likely to ‘impair' or reduce future profits.

Tata Power's management estimates that they may end up paying $35-40 per tonne more on coal imports than they originally estimated. If this coal cost is to be passed through, power tariffs charged by the Mundra project should be Rs 2.9 per unit as against Rs.2.26 per unit originally bid.

Coal venture to gain

While Tata Power has taken an impairment charge in its books today, in line with a conservative accounting policy, the development may not be entirely detrimental to the company. The company owns a 30 per cent stake in the Indonesian coal mining venture and that venture is likely to benefit from the higher realisations on coal exported to this project.

Tata Power also plans the transfer of 75 per cent stake in the coal venture to the Mundra project to improve its financial standing. By bringing the coal assets in Mundra UMPP, higher coal realisations may offset the losses incurred on power sold. Banks would also be more willing to lend to Mundra SPV after the consolidation, as the financial position will improve.

Already discounted?

Tata Power's stock has already corrected 27 per cent in the last four months after the new mining laws in Indonesia. The decline has been mainly because of worries that the 4,000-MW Mundra project would not make any positive contribution to the company's bottomline due to this development. The project is near completion with the first unit (800 MW) expected to supply power to the grid beginning March quarter. The remaining four units will be commissioned during the next fiscal year.

How did Tata Power arrive at the impairment charge of Rs 823 crore (after setting aside forex charges of Rs 162 crore)? The management explained in its conference call that it has assumed fuel costs of $110 per tonne during the first three years followed by $83 per tonne with an escalation thereafter. As coal prices move each quarter, the ‘impairment charges may be hiked or reduced.

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