In an interview with CNBC-TV18, Harshvardhan Dole, VP - Institutional Equities, IIFL, spoke about recent developments at Tata Power, such as the Delhi electricity regulator’s decision to liquidate regulatory assets on the books of the Delhi discom run by the company via a tariff raise, and the central regulator’s decision to allow a tariff hike at its Mundra plant.
Below is the Harshvardhan Dole’s interview with CNBC-TV18’s Latha Venkatesh and Sonia Shenoy.
Sonia: What is your view on the entire issue and your approach on a stock like Tata Power and how much it could alleviate the pressure over there?
A: The initiative by Delhi Electricity Regulatory Commission (DERC) is in the long-term interest of the consumers because the losses keep on mounting with a carrying cost.
Eventually these companies will have no option but to essentially declare a sort of bankruptcy. It may be a joint venture with the government but the financial viability of that particular revenue model was and is under question.
Although this is a stopgap arrangement -- it allows recovery of the historical uncovered costs along with certain carrying cost over a period of eight years starting FY15 I think -- the stress on the balance sheet should start reducing over the next two-three years if not immediately.
Ideally these things should have been addressed in a shorter period of time for liquidation of these dues.
Latha: What is this opinion on Tata Power and Reliance Infrastructure stocks?
A: We don’t cover Reliance Infra actively. We have a strong buy on Tata Power. We think that gradually the company is consolidating its operations and focusing on improving the return on existing assets rather then rampantly investing in new projects. We like Tata Power most among private-sector players.
Latha: What is your target price?
A: If Mundra continues to make zero percent return on equity (ROE), fair value of the stock is anywhere between Rs 90-95.
We also need to see the utilization of the proposed rights issue. I suspect a large part of the issue will go to run down the corporate-level debt.
The risk-reward ratio is favorable for long-term investors.
Sonia: If you have done any number crunching on how much it could eventually bring down the interest cost and perhaps the receivables in the future for Tata Power?
A: The interest cost should be a pass-through in the tariff and that is what the liquidation of regulatory assets would actually mean. So far Tata Power was kind of partly building in part of the interest cost into the tariff and part was actually impacting their bottom-line.
Frankly, we need to see as to how this exactly regulatory asset was being funded. The disclosures are quite opaque to that extent and I would expect that even if it was funded 50 percent debt and 50 percent equity, there should be good amount of savings to the bottom-line.
I would suspect in the region of around Rs 50-100 crore assuming it was funded out of 50 percent debt and 50 percent equity.
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