This at a time when the company is focusing on renewable energy
The 4,000 Mw Mundra, Gujarat-based CGPL, is one of several “ultra mega” power plants that the United Progressive Alliance had bid out in 2007 in an effort to bridge India’s power deficit
Last year, Tata Power announced that it would freeze investments in coal power generation to focus on renewable power. It is ironic, then, that the 12,808 Mw company has been waiting some months for the green signal to merge its loss-making subsidiary Coastal Gujarat Power Ltd (CGPL) with itself.
The 4,000 Mw Mundra, Gujarat-based CGPL, is one of several “ultra mega” power plants that the United Progressive Alliance had bid out in 2007 in an effort to bridge India’s power deficit. Based on imported coal but initially locked in to a committed tariff, the plant suffered losses when Indonesia, its principal coal supplier, sharply raised prices.
Over the past few years, however, Tata Power has been working at putting the spark back in CGPL. The first order of business has been reducing CGPL’s debt. This much is evident from a 28 per cent drop in losses from Rs 891 crore in 2019-20 to Rs 637 crore during 2020-21.
This was the result of a series of steps last year. “First, we opted for blending coal, buying different types of coal from the spot market. It offered us flexibility and enabled us to bring down our under-recoveries,” said Praveer Sinha, chief executive officer and managing director, Tata Power. Under-recoveries refer to the differential between fuel costs and tariffs.
This move, however, resulted in a marginal drop in CGPL’s fuel expenses to Rs 5,656 crore in FY21 against Rs 5,728 crore in FY20. “Mundra had under-recovery of 90 paisa a unit a year before the last, which we brought down to 45 paisa last year. Under-recovery will remain but going forward we will bring it down to the minimum,” he added.
The reduction in under-recovery is, however, still precarious with the quarter ending March 2021 showing Rs 0.74 per unit against Rs 0.45 in the same quarter of the previous year. Tata Power had said this was on account of an increase in coal cost without a corresponding increase in fuel revenue and was due to a time lag in the escalation index, which reflects the increased coal cost in the sale price.
The company expects to bridge this with the half-yearly tariff resetting from May 2021 onwards. Meanwhile, the company is waiting on regulatory approval for a “compensatory tariff”, which will enable it to pass through the higher cost of coal, irrespective of the Rs 2.66 a unit tariff fixed in 2007. Sinha said the Gujarat government’s high-powered committee is yet to take a decision on account of some challenges. The Supreme Court has said the issue should be resolved bilaterally with the state government. That is yet to happen. “Both sides will pursue it,” Sinha said.
The bigger gain for CGPL was the halving of its debt from Rs 8,797 in FY20 to Rs 4,055 in FY21. This was achieved mainly through the money Tata Power raised from existing businesses, such as defence and shipping, and from selling its stake in wind farm company Cennergi, a South African joint venture with Exxaro Resources. This sharply reduced CGPL’s finance and interest cost from Rs 1,179 crore in FY20 to Rs 991 crore in FY21.
CGPL’s merger with Tata Power is another element of that strategy, Sinha said. Initial approval from the National Company Law Tribunal for the merger process has been received. The shareholder and creditor approvals are also in place but the final approval is yet to come because the pandemic has delayed court sittings.
Tata Power’s decision to freeze investment in coal power generation is not a result of its sour investment in Mundra but because of a conscious move towards clean energy in sync with the group’s environment, social and governance goals. It is also focusing more on the transmission and distribution (T&D) business.
This change has started reflecting in its revenue mix. In FY21, for instance, T&D had the highest share of 45.4 per cent in its revenue with coal-based generation constituting 34.3 per cent. In FY20, the two segments were neck and neck with T&D constituting 41.4 per cent of revenue and coal-based generation 41.8 per cent. The increase in T&D was largely due the acquisition of the Odisha power distribution licences in FY21. Coal-based power, however, continued to be the highest contributor to EBITDA at 34.3 per cent in FY21 with T&D closing in at 32.3 per cent. But the share of green power generation in EBITDA fell from 10.7 per cent in FY20 to 9.1 per cent in FY21.
According to financial service advisor Axis Capital, the strong growth in solar EPC (engineering, procurement and construction) including building solar rooftop and water pump installations, was offset by the negative impact of higher imported coal prices, a deferred tax adjustment in Tata Power’s Delhi distribution business and lower profit contribution from Tata Projects, an associate company.
Brokerage Motilal Oswal also predicts that solar EPC will give the company’s earnings a leg-up over the next two years. “Recent award wins, particularly from NTPC, have seen its EPC order book swell to Rs 9,000 crore… We expect EBITDA from solar EPC to rise at 16 per cent CAGR over FY21-23 to Rs 440 crore. This, combined with commissioning of renewable projects and takeover of Odisha distribution companies and lower interest costs, should lead to 24 per cent CAGR in profit after tax over FY21-23,” the report said.
Tata Power expects to commission 900 Mw of renewable projects in the next six to nine months. Capital expenditure is expected to be Rs 7,000-8,000 crore in FY22, of which half would be for the renewables portfolio and another Rs 1,000 crore for the Odisha power distribution business. This change in the company’s strategy is visible in its debt profile; the green energy portfolio housed in Tata Power Renewable Energy (TPREL) has started to show a debt level of Rs 5,229 crore — which is higher than Rs 4,055 crore for CGPL.