Tata Power's Mundra Project Fully Commissioned, Cash Flows Under Stress

The power sector has seen a host of positive changes in the last one year but they are mostly to address the problems related to domestic coal shortages as well as to improve the financial health of the state electricity boards.

The issues of the power companies consuming imported coal, however, have not yet been addressed. The prominent name in this list is Tata Power which has is now fully commissioned its Mundra ultra mega power plant (UMPP). This power project is the first UMPP that has fully commissioned a few months ahead of schedule.

However, Tata Power has not made any money from this project as it has been consistently seeing losses after it commissioned the first unit of this UMPP. The change in regulation in Indonesia has seen the company paying nearly double the price for imported coal than was originally contracted for. The profits have dented and the margins have fallen. Mundra UMPP is the real drag on Tata Power's business at the moment.

Considering that the coal prices have increased and rupee has depreciated, the company has asked for a tariff hike from the states which are procuring power from this project but its plea has been rejected by the SEBs, saying that Tata Power cannot raise the tariffs as per the original procurement contract. The procurement contracts were signed before changing the regulations in Indonesia and no company had foreseen these changes.

The project cost for Mundra is Rs 18,000 crore, which is funded by 25% of equity and 75% of debt. The losses have seen the decline in equity and hence UMPP has tainted its balance sheet. The balance sheet of the CGPL (Special purpose vehicle of Tata Power operating the Mundra UMPP) is carrying a debt of Rs 10,800 crore by the end of FY12. This has put the balance sheet of Tata Power under stress as it is carrying a total debt of Rs 29,733 crore by end of FY12.

Future cash flows from the project may not be very robust due to the mismatch between the price and cost and hence Tata Power had made a provision of Rs 1,800 crore for impairment of loss in the project.

Mundra UMPP is a representative example of how the government policies can impact a fine run company. Despite few positive steps taken by the government, the sector has not caught any attention of investors. The real positive for the sector would be if the tariffs of electricity procured form Mundra UMPP are raised. That is when the sector would get re-rated.