Zero consideration alone may not solve Tata Power’s Mundra problem


Tata Power Co. Ltd’s proposal to offer a controlling stake in its troubled Mundra power plant for almost nothing comes as no surprise.

Indeed, despite the unprecedented offer, there is scepticism that a solution can be found that easily for such a complex problem.

An expert who tracks the sector says except for the Dabhol power station, in which the government has a stake, India has seen no instance of a state-owned power distribution company (discom) taking over a large power plant from a private company.

So far, the company has just put forward a proposal. It will now have to convince multiple discoms, negotiate the ownership structures, thrash out the debt sharing and go through the entire regulatory process.

The whole journey can take a minimum of two years.

In the meantime, Tata Power will have to continue to fund the losses at the plant, which stood at Rs849 crore last fiscal.

The company itself has said that stake sale is one of the options being considered. The proposals are still in the exploratory stage and any solution is likely to be a long drawn-out process.

That said, given the conciliatory view of the central government and the fact that Bharatiya Janata Party governments are in place in all the states with which Mundra plant has power purchasing agreements (PPAs), a policy intervention (if any) can help fast-track the resolution.

Also, as two analysts with domestic broking firms point out, the plant is competitive. Electricity from the plant, priced at Rs2.4 per unit, is among the cheapest. Even if one has to add fuel cost under-recovery, the tariff from the plant is expected to remain competitive at the given volume and scale, the analysts say. “So, nobody will want to snap the PPA,” they point out.

Transfer of ownership can help state electricity regulators consider the plant as a public asset, potentially smoothening the cost recovery process. Even then, as one analyst cited above says, nothing is certain. The plant is dependent on imported coal. Even if the government provides it a domestic coal linkage, transportation from the mines can be an expensive proposition.

Further, what will happen if international coal prices spike again? Discoms (if they assume ownership) will have to convince regulators for a price hike. Do they have the wherewithal of sourcing international coal at competitive prices?

So, a free power plant alone may not be enough to seal a deal. Given the uncertainties, discoms may as well ask Tata Power to continue to assume responsibilities such as providing fuel security. That means much depends on how the discoms react to the problem a well as the solutions they offer. Tata Power’s proposals are only a step in the resolution process.

Nevertheless, even if Tata Power manages to find a solution two years down the line or reduces the losses at the plant even by half, it will be a huge relief to investors. Currently, a significant part of the company’s earnings are being negated by the losses at the Mundra plant. An elimination or a reduction of losses even by half will have a significantly positive impact on earnings.

Till a solution for the Mundra imbroglio is found, the key triggers for the stock will be the debt reduction measures the company promised investors this fiscal. Acquisition of the renewable assets from Welspun has pushed up debt-equity ratio to about three times. With the Mundra power plant continuing to lose money, investors are worried Tata Power will be stuck with low returns for quite some time. The earlier it belies the fears, the better it will be for the stock.

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