Insolvency process: Toxic asset buy to hit Tata, Adani Power finances

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Tata Power and Adani Power will have to take additional debt to fund the acquisition of new power assets being auctioned under the Insolvency and Bankruptcy Code (IBC). This will put them under financial stress, given their high debt and poor profitability. 
Resurgent Power — a joint venture owned by Tata Power and ICICI Bank — announced on Wednesday that it has acquired  Prayagraj Power, earlier owned by the Jaypee group. But on Thursday, JSW Energy sweetened its offer for Prayagraj and a final decision will be taken by the lenders.  

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The new acquisitions will augment the capacity of the buyers, but experts feel it could also be a cause of financial stress.

Tim Buckley, director, energy finance studies, Australasia, Institute for Energy Economics and Financial Analysis, Sydney, said, “Adani Power and, to a much lesser extent, Tata Power are both in financial distress. Adani Mundra 4.6GW and Tata Mundra 4.0GW import coal-fired power plants are in ongoing financial distress.” Buckley said he anticipated more trouble for these firms because of doubling of the imported coal prices since the start of 2016 and recent depreciation in the rupee. “They can’t even cover their fuel costs, let alone the depreciation or interest expense,” he added.

Tata Power declined to comment. Emails sent to Adani Power did not elicit a response.

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Analysts said losses at Mundra projects have translated into higher indebtedness and poor profitability. 

Adani Power had debt-to-equity ratio of 27.1 (on a consolidated basis) at end-March. Outstanding debt was Rs 528 billion, up from Rs 447 billion three years back, according to Capitaline database.

The debt was supported by Rs 8.85-billion shareholder equity at the end of FY18. The company has reported losses in four of the past five years.  

Tata Power is in better financial position, claim analysts, but is not out of the woods. Its total debt was Rs 486 billion at the end of FY18, up from Rs 406 three years back.

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The company’s networth was Rs 152.6 billion. Thus, the debt-to-equity ratio was 3.4, according to Capitaline database.

“Tata Power is in a better financial position to absorb additional debt but fresh acquisition of coal-fired power assets doesn’t make sense for the company’s shareholders, given historically poor returns in the sector,” said G Chokkalingam, founder and managing director, Equinomics Research & Advisory Services.

Analysts said these acquisitions also raise the risk for banks. 

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“Why would a bank accept a non-recourse loan to a subsidiary, particularly one with massive construction and development risk, without pricing in a higher loan cost to cover the higher default risk?” said Buckley.

Most of the debts to the thermal power sector that have gone bad were provided by public sector banks (PSBs), including Power Finance Corporation and the Rural Electrification Corporation. 

“The government needs to hold the PSBs to a higher standard of professionalism. Else taxpayers will continue to subsidise billionaire promoters. The promoters get the upside on investments, but taxpayers are unwittingly underwriting all the financial risks. Until this situation is resolved by the Reserve Bank of India, promoters will continue to excessively rely on debt-fuelled binges,” said Buckley.

But once Mundra is excluded, both Adani Power and, to a greater degree, Tata Power get cash. 

Both have asked the Gujarat government for a bailout. The government has set up a committee led by former a Supreme Court judge to find a solution. 

After the sale of non-core assets, Tata Power’s financial status will improve. Both groups are wedded to debt-funded growth, Adani more than Tata, said Buckley.  

With India’s economic growth set to be at 6-8 per cent per annum for the coming decade, energy demand is likely to grow at 5-7 per cent. Electricity production will grow at 4-6 per cent per annum. By 2030, production will be double of current output. Coal will play a key if diminishing role. 

“Hence, buying existing, relatively new domestic coal fired power plants at a 25-50 per cent discount to construction cost is seen by Adani and Tata as a better way to leverage their incumbent thermal power businesses than building for greenfield projects, particularly with Adani’s domestic coal mining business set to expand five-to-10 fold over the coming decade, potentially resolving the coal supply issues of many coal power plants,” he said.