Slump sale of Mundra project will improve Tata Power’s valuations

Power lines (Representative Image)

Jitendra GuptaMoneycontrol Research

Slump sales of power projects using imported coal are the order of the day as companies find that expected returns will be nowhere close to original estimates. Earlier this month Adani, Power announced that it would be transferring its Mundra power generating business to its arm Adani Power (Mundra). Now, Tata Power is open to selling 51 percent in its 4000 mW Mundra-based ultra mega power project for as low as Re 1.

Tata Power’s Mundra plant - Costal Gujarat Power (CGPL) - became economically unviable after Indonesia’s ruling on coal exports. The new rule led to CGPL’s generation cost rising to Rs 2.85 per unit as against the power supply agreement signed at Rs 2.26 per unit.

The Mundra project has been a drag on Tata Power’s performance. Tata Power is sitting on accumulated losses of Rs 3,100 crore, which will rise further if it continues to supply power below its cost. Close to 25 percent of the company’s capital is stuck in the Mundra project. The equity has already been wiped out, and at some point, this will also have implications on the debt of close to Rs 14,000 crore tied to Mundra facilities.

If 51 percent stake is sold, Tata Power will be able to bring its debt down by close to Rs 14,000 crore as against its current consolidated debt of close to Rs 48,000 crore.

That apart, there will be a huge boost to the profitability of the parent company as a result of lower interest cost and losses pertaining to Mundra project. To put it in perspective, in FY18, Tata Power is expected to make a net profit of about Rs 1,800 crore, which includes an estimated loss of Rs 1,200 crore from Mundra project. If the stake is sold, because of the share of the loss (49 percent stake), Tata Power’s profit could theoretically increase by close to Rs 600 crore.

Any resolution, even a small stake sale, could be hugely positive for Tata Power, as the company has already invested close to Rs 6,000 crore of equity, provided bank guarantees of worth Rs 3,000 crore and given a loan of close to Rs 4,000 crore. Except for CGPL, all its businesses are doing well and earning a double-digit return on equity.

The stake sale will allow the company to show better profitability and return ratios which will have a positive impact on valuation. Currently, based on FY18 earnings, the Tata Power stock is trading at 12 times. But if the stake sale in CGPL fructifies and losses reduce, the price to earnings multiple will work out nine times forward earnings.