Mundra UMPP to hit Tata Power's earnings

According the media reports, Tata Power Company (TPC) has commissioned the country’s first Ultra Mega Power Project (UMPP), Mundra UMPP. With this, the company's total capacity has gone to 4597 MW.

Mundra UMPP is TPC's biggest project, and has 5 units of 800 MW each. The first unit of this plant has commissioned operations. The rest of the units will commissioned further in this calendar year, at intervals of 3-4 months. The total project cost of this UMPP is Rs 17000 cr, funded through a mix of debt and equity.

This project is based 100% on Indonesian coal, with 25% at a fixed price and 75% at benchmark price. Recently, the Indonesian govt. has asked its miners to sell all coal at benchmark price, due to which TPC will see an approximately UD$30-35 rise in the price of the fixed component of coal. As per the management's estimates under the current tariff norms, this project will suffer a loss of about Rs 480 cr when it is  fully commissioned. TPC's management is negotiating with the govt. for tariff hikes. The company is also seeking the possibility of running the plant on low calorific value coal, which is available at cheaper cost in various countries.

The impact of the Mundra UMPP on TPC’s revenues will be very significant. In Q2 FY12, the company made a provision for impairment (Rs 823 cr) for its Mundra project. Owing to the loss in the Mundra project as well as the forex losses (Rs 638.96 cr), TPC has disappointed its investors with a net loss of Rs 1219 cr in the quarter.

Even though the company can earn higher revenues in the Indonesian coal mines, TPC itself turns out to be a customer for the coal from these mines. The per-unit tariff at the Mundra projects is Rs 2.26, which is insufficient to cover the costs of imported coal under the revised Indonesian coal price regulations. Also, as the other units will be commissioned, its margins and profits will further take a toll.

In recent times, we have witnessed price hikes by many SEBs. Hence, in the longer term, we foresee that the Mundra project will witness upwardly revised tariffs, though at a very slow pace. There are a total of 16 UMPPs planned in the country. 3 of these are being constructed by Reliance Power and 1 by NTPC. The commissioning of the Mundra UMPP is an important step in the Indian power sector, and its progress will be keenly watched by the developers of the other UMPPs.

As far as Tata Power is considered, the UMPP will erode its revenues unless the company scouts for low-priced coal or gets approval for the revision of tariff. In this light, it is better to stay away from the stock.