Tata Power: SC allowing compensatory tariff could be a game changer

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26 Aug, 2025 12:21

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Jitendra Kumar GuptaMoneycontrol Research

Operators of power plants based in Mundra, with a combined capacity of around 9,000 MW, can finally heave a sigh of relief as the Supreme Court has allowed them to charge compensatory tariff for power generated at their plants there.

Power generators, particularly Adani Power and Tata Power, have been bleeding for quite some time now because they were not allowed to pass on an increase in cost of generating power because of the rise in prices of Indonesian coal, which they were importing.

Tata Power's and Adani Power's Mundra plants have capacities of around 4,000 MW each that had become unviable because of the rise in cost of generating power. Generation cost for these plants rose to around Rs 2.8 per unit.

However, much before the cost of imported Indonesian coal rose, these plants had signed long-term power purchase agreements (PPAs) to supply power at Rs 2.3-2.4 per unit.

How would it impact?

While the court's decision is positive, it has come too late because these plants have already suffered huge losses because of the difference in tariffs and cost of generating power.

To put it in perspective, because of losses due to under-recoveries, Tata Power's debt has risen from Rs 40,000 crore in FY15 to Rs 50,000 crore at the end of FY18. Its interest coverage ratio has remained at 1-1.6 times over the last four years. The Mundra power plant reported a net loss of Rs 1,719 crore for FY18.

Currently, the project’s cost of power (under-recovery) is Rs 0.83 per unit higher than the contracted price. This year, in the first two quarters, it has incurred a loss of Rs 895 crore.

However, Tata Power, which has over 10,000 MW of capacity and cash flows from other ventures, has been able to absorb the pressure. Moreover, it has an Indonesian coal joint venture that supplies coal to its Mundra project at the prevalent market rate.

For the first half of the current financial year, this JV made a profit of Rs 570 crore. While these are two separate entities, on one hand, Tata Power is earning a profit on coal while on the other side, it is showing it as a cost and reporting losses as a result.

Nevertheless, the Mundra project accounts for close to 25 percent of Tata Power’s consolidated capital in the business and a large chunk of the company's debt. After the Supreme Court’s verdict allowing changes in PPAs, the ball is now in the CERC’s (Central Electricity Regulatory Commission) court.

If allowed, the power generators will be able to pass on under-recoveries of around Rs 0.8-0.9 per unit and thus reduce their losses from these plants.  From a valuation perspective, even a reduction of Rs 1,000 crore in the Mundra plant's losses should add Rs 8,000 crore to the company's market capitalisation (currently Rs 20,975 crore) based on a price to earnings of around 8 times.

This is why the stock has risen around 25 percent (adding Rs 4,200 crore in market capitalisation) over the last few trading sessions, thus accounting for a part of these gains.

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