Mundra may cause Tata Power Rs500 crore loss

Indonesia’s decision to benchmark its coal to international prices is seen eroding the profitability of Tata Power’s 4,000 mw ultra mega power project (UMPP) at Mundra, Gujarat by as much as Rs480-600 crore.

The first unit of the UMPP, of 800 mw, is expected to be commercial by February.

After a meeting with Tata Power officials, analysts Parag Gupta and Satyam Thakur of Morgan Stanley Research wrote in a note on Tuesday that India’s largest integrated private power utility does not expect the Indonesian government to make any exception for the company.

“Hence, the potential change in Indonesian regulations could affect Mundra’s profitability by about $100 million (Rs480 crore),” Gupta and Thakur noted, maintaining their underweight stance on the scrip, which rose 1.15% to Rs997 on the BSE on Tuesday.

Deutsche Bank’s Abhishek Puri, Manish Saxena and Anup Kulkarni see a bigger blow. Annual operating loss from the project will be Rs500-600 crore, the three analysts said in a note on Tuesday.

Tata Power through two special purpose vehicles holds 30% in two mines, PT Kaltim Prima Coal and PT Arutmin Indonesia, and a coal trading company, all owned by PT Bumi Resources Tbk.

The production at the mines in 2010 was 60 million tonne (mt), which will go up to 75 mt in 2013.

The Mundra project’s requirement is 12 mt.

An email sent to the company remained unanswered at the time of going to press.

IDBI Capital’s Rohit Singh said in an August 26 research note that a coal price assumption of $83 a tonne would lead to a 54 paisa/unit loss at an average tariff of `2.26/unit in the first year of full operation (FY14).

Tata Power managing director Anil Sardana had in an interview to DNA earlier this month said the UMPP is not viable at the moment. “We have tremendous impact due to imported coal on Mundra because the price of coal has increased multi-fold. We have raised it before Central Electricity Regulatory Commission. In their evaluation, coal prices are expected to increase at 3.46% per annum. Instead, they have grown 131% since the time we bid, which is 5-6 times more,” he had said.

Bank of America Merrill Lynch (BofA ML)’s Bharat Prekh in his report on Tuesday said that a key risk for Tata Power has come true with the Indonesian government disallowing export of 2.5 million tonne per annum (mtpa) of coal at a fixed price of $40/tonne to Mundra for five years, and the Indian government remaining undecided on whether the cost hike can be passed-through to Tata Power’s clients. Both BofA ML and Deutsche were neutral on the stock.

Tata Power has written to the Ministry of Power stating the unviability of the UMPP and asking for a revision in tariffs.
While the domestic availability of coal this year is said to be 554 million tonne, the demand is 142 mt higher, of which nearly 67 mt will be imported. The shortfall is tipped to climb to 200 mt by 2017, when imports are slated to touch 100 mt.

Local power producers are increasingly looking to acquire coal blocks overseas to meet their huge capacity addition ambitions. India has projected an addition of 100,000 mw between 2012 and 2017.

The Morgan Stanley and BofA ML reports said Tata Power could cut losses at Mundra by operating at a plant load factor of 70-80%, using lower grade coal and acquiring a captive mine. “The company has already built coal inventory of 1 mt, so the new regulations should not affect the pricing of this quantity,” Gupta and Thakur noted.

Tata Power plans to take its installed capacity from the current 3,120 mw to 25,000 mw by 2017 at a cost of about Rs70,000 crore.