Will The Mundra UMPP Turn Into An NPA?
DSIJ Intelligence / 06 Feb 2012
According to the print media, the managing director of Tata Power, Anil Sardana, in an interview has said that its Mundra project may become an NPA (non-performing asset) in the future if the prices are not revised upwardly. This could be a big setback for the company as well as for the power sector, especially for the companies developing UMPPs (ultra mega power plants). Due to this news, the stock has fallen by over 4 per cent today and may see a further decline.
The Mundra project is a UMPP won by Tata Power through competitive bidding in 2007. The tariff for the project has been set up at Rs 2.26 per unit. The project has five units, each of 800 MW, of which Unit I is ready for commercial operations. The five states that will benefit from this project are Gujarat, Maharashtra, Haryana, Rajasthan and Punjab. This project is entirely based on Indonesian coal and the company has acquired mining assets for the same in Indonesia. Though the company has excellent backward integration for this project, the recent regulation by the Indonesian government has hurt the financial viability of the project.
The Indonesian regulation of September 2011 has directed all its coal companies to sell coal at the benchmark prices. This has hurt the progress of many companies in the power sector as Indonesia is the biggest coal supplier to India, and particularly the power sector. After the new regulation, the stock price of Tata Power has taken sizable beatings. In CY11 alone the price fell by 36 per cent. We believe that the possibility of the Mundra project becoming an NPA is moderate to high if the government does not intervene soon. A further price fall can be expected.
The Mundra UMPP is a Rs 17,000 crore project. It has a total debt of Rs 8,134 crore, of which nearly 60 per cent i.e. Rs 4,833 crore is a foreign currency loan. With the rupee trading at the level of Rs 49 against the dollar, we believe that this amount will further go up. Its debt to equity ratio as of FY11 is 2.56x which we believe is uncomfortable given the future financial performance of the company.
In the second quarter result for this fiscal the company has made a provision of Rs 823 crore for the impairments that will arise due to the changed coal prices in Indonesia. Therefore, on a consolidated basis the company has reported loss of Rs 1,218 crore.
According to the management estimates under the current pricing, the Mundra project will see losses of about Rs 450 - 500 crore each year when all the five units are commissioned. The selling price that the company wishes to charge is Rs 3.05-3.10 per unit as against the current Rs 2.26 per unit which will make this project profitable. The Gujarat government has opposed any price hike and discussions with the state and the central government are currently underway. It has also been noticed there is high political agitation against electrify tariffs. Further, given the national election in 2014, the government may not initiate any un-populist actions.
Even if the price hike is accepted it may be lower than as expected by the management of Tata Power. Given the circumstances, our advice to the readers is to currently stay away from the scrip. The project is not yet fully operational and once it goes live the share price may see further losses.
The Mundra project is a UMPP won by Tata Power through competitive bidding in 2007. The tariff for the project has been set up at Rs 2.26 per unit. The project has five units, each of 800 MW, of which Unit I is ready for commercial operations. The five states that will benefit from this project are Gujarat, Maharashtra, Haryana, Rajasthan and Punjab. This project is entirely based on Indonesian coal and the company has acquired mining assets for the same in Indonesia. Though the company has excellent backward integration for this project, the recent regulation by the Indonesian government has hurt the financial viability of the project.
The Indonesian regulation of September 2011 has directed all its coal companies to sell coal at the benchmark prices. This has hurt the progress of many companies in the power sector as Indonesia is the biggest coal supplier to India, and particularly the power sector. After the new regulation, the stock price of Tata Power has taken sizable beatings. In CY11 alone the price fell by 36 per cent. We believe that the possibility of the Mundra project becoming an NPA is moderate to high if the government does not intervene soon. A further price fall can be expected.
The Mundra UMPP is a Rs 17,000 crore project. It has a total debt of Rs 8,134 crore, of which nearly 60 per cent i.e. Rs 4,833 crore is a foreign currency loan. With the rupee trading at the level of Rs 49 against the dollar, we believe that this amount will further go up. Its debt to equity ratio as of FY11 is 2.56x which we believe is uncomfortable given the future financial performance of the company.
In the second quarter result for this fiscal the company has made a provision of Rs 823 crore for the impairments that will arise due to the changed coal prices in Indonesia. Therefore, on a consolidated basis the company has reported loss of Rs 1,218 crore.
According to the management estimates under the current pricing, the Mundra project will see losses of about Rs 450 - 500 crore each year when all the five units are commissioned. The selling price that the company wishes to charge is Rs 3.05-3.10 per unit as against the current Rs 2.26 per unit which will make this project profitable. The Gujarat government has opposed any price hike and discussions with the state and the central government are currently underway. It has also been noticed there is high political agitation against electrify tariffs. Further, given the national election in 2014, the government may not initiate any un-populist actions.
Even if the price hike is accepted it may be lower than as expected by the management of Tata Power. Given the circumstances, our advice to the readers is to currently stay away from the scrip. The project is not yet fully operational and once it goes live the share price may see further losses.
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