Tata Power Commences Mundra Unit

Tata Power has commissioned the first unit of its ambitious project Mundra Ultra Mega Power Project (UMPP). This is the first UMPP to get commissioned in the country. The project work was started in 2008 and took about 48 months to reach this stage. 

The Mundra project is the biggest project of its kind by Tata Power Company and has five units of 800 MW capacity with a total capacity of 4,000 MW. The project is based on super-critical technology and the total project cost is Rs 17,000 crore (debt to equity ratio is 75:25). The project is 100 per cent based on Indonesian coal with 25 per cent of coal at a fixed price and 75 percent of it at a benchmark price. This project will supply electricity to five states at the price of Rs 2.26 per unit. 

After the Indonesian government made it mandatory to sell coal at the international benchmark price, all the power projects based on imported coal in India are showing decline in profits. Due to this regulation the Mundra project will also see a rise in coal prices and if the tariffs are not hiked this project will suffer a loss of about Rs 480-500 crore after it is fully operational. The company management is negotiating with the government for tariff hikes and an outcome is being looked forward to. 

The one positive factor this project can bank on is the assurance of domestic coal supply as indicated by the prime minister to Coal India. However, it remains to be seen as to how favourable it will be since this project is based on super-critical technology and the lower grade coal may not be feasible feed for the boilers. The company is also seeking possibilities of buying from other countries. 

Recently the head of the Tata Group, Ratan Tata, reportedly said that the Mundra UMPP may turn into a non-performing asset (NPA) if the tariff hike does not take place. This would be of serious concern for the investors. 

UMPPs are augmented to meet the electricity deficit on the country. Among the private companies, Reliance Power has won three UMPPs through the bidding process, each of which is of 4,000 MW capacity. The work at Reliance Power’s Krishnapatnam UMPP has been stopped due to several hurdles. In the case of the other UMPPs, the work is yet to start. 

In the September quarter result, Tata Power reported loss due to the higher provision made for any potential impairments arising in the Mundra project. In its nine-month result the company has posted a loss of Rs 330 crore against profit of Rs 1,551 crore in the corresponding period last fiscal. With the Mundra project on-stream it will start consuming the imported coal and hence we expect lower margins henceforth. Besides, the higher depreciation of rupee will further make the imports costlier. 

According to article on Bloomberg website, Tata Powers’ Maithon project (1,050 MW based on domestic coal) is also not getting enough coal to reach full capacity. This indicates that there are more hot waters for the company. The stock is up by 23 per cent on an YTD basis. Over the last year the scrip tanked by 36 per cent and remained out of investors’ fancy. The scrip has been hovering at the current level for more than a month’s time. 

We carried full analysis of Tata Power in our magazine Dalal Street Investment Journal dated December 5, 2011, Vol 26, Issue No 26.  We continue to maintain our advice to avoid the scrip.