Tata Power stock hit by concerns over tariff hike at Mundra plant

The stock of Tata Power has underperformed the BSE Power Index for a long time now. While it has lost 2.3 per cent in the past three months, the index has gained 2.7 per cent during the same period.

Concerns over tariff hikes for its 4,000-megawatt Mundra power plant in Gujarat and balance sheet deleveraging are among the major issues hurting investor sentiment.

In the case of Mundra plant, the Central Electricity Regulatory Commission has allowed tariff hike after the company negotiated with the five states it supplies power to from this plant. However, three states (Rajasthan, Maharashtra, and Haryana) are yet to give their approval. Haryana and Gujarat have given in-principle approval for tariff hikes. And, Tata Power, according to the clause, cannot take the new rates unless approval from all states is in place, say analysts.

The other issue for the Mundra plant could arise from coal supplies from Tata Power’s Indonesian mines. In a report in November last year, analysts at Motital Oswal had said, “The upcoming new regulations for Indonesian coal mines (concerning tax and royalty) could be an overhang for the stock.”

The licences of these mines are due for renewal in 2021. Unless clarity emerges on this front, the degree of improvement in Mundra plant’s underrecoveries would be keenly watched.

Also, elevated debt levels due to continuing capital expenditure or capex (net debt-to-equity ratio of 2.2x) and higher receivables for renewable portfolio is another overhang for the stock.

The bad news ends here. Analysts say, much of the Mundra plant concerns are priced in the stock. Secondly, the company is on the path to deleverage its balance sheet with the sale of its non-core assets, such as a South African entity Cennergi, ITPC Zambian Entity, among others. While these could help raise over Rs 2,600 crore (according to ICICI Securities estimates), the Street is awaiting progress on this front.

The other positive news is that Tata Power has recently won licences for distribution and retail supply of electricity in Odisha’s five circles, including the main cities of Bhubaneswar and Cuttack. Gains from these will be felt in the medium- to long-term.

According to analysts at Edelweiss Research, Odisha’s supply and distribution licence is not a sizeable one, but has grown at a healthy pace of 7 per cent in the past five years. They believe returns could gain significant heft over the next three-four years. Moreover, there is scope for reducing the aggregate, technical and commercial (AT&C) loss, estimated at over 30 per cent, in these circles.

The domestic broking house has a ‘buy’ rating, with target price of Rs 87 apiece for the stock trading at Rs 58. The Odisha’s electricity supply and distribution operations will be through a special purpose vehicle (SPV) in which Grid Corporation of Odisha will own 49 per cent and Tata Power 51 per cent.

Analysts at ICICI Securities estimate the entity’s (the SPV’s) annual profit after tax to reach Rs 300 crore per annum from the fourth year onwards. The SPV will have to take additional debt to undertake capex to improve operations.

Given that these operations will help Tata Power earn fixed and regulated returns of around 15.5 per cent on the equity capital invested, it should add to the overall kitty in the coming years.

Unless key issues of Mundra and debt linger for long, long-term growth opportunities, mainly in distribution, seem to be improving for Tata Power.

The stock is also currently trading at a reasonable 10x its 202-21 estimated earnings.

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