- A large part of the ₹23,000 crore debt reduction is contingent on restructuring of the renewable energy projects portfolio
- According to analysts the company is looking to raise funds through stake sale or infrastructure investment trust
For a company stuck with unviable power off-take contracts and heavy debt, one way to improve returns is to rework the original contract terms and lighten the balance-sheet.
Tata Power Co. Ltd has been working on both for some time now. But given the slow progress till now, investors are taking the company’s latest debt reduction plan with a pinch of salt. The company told analysts that it aims to cut its debt by ₹23,000 crore, almost half of its total debt of ₹48,376 crore. But the company’s shares haven’t budged since the time this shared by the company on 19 May.
Of course, debt reduction is the need of the hour. Last fiscal, more than half of the company’s operating profits (54%) were taken away eaten by interest costs. Analysts at Jefferies India Pvt. Ltd estimate every 5% reduction in interest cost can add 7% to Tata Power’s FY22 projected earnings.
A large part of the ₹23,000 crore debt reduction is contingent on restructuring of the renewable energy projects portfolio. According to analysts the company is looking to raise funds through stake sale or infrastructure investment trust.
But with credit markets tight and finances of discoms taking a hit due to covid-19 pandemic, many doubt if Tata Power will be able to raise such large amounts.
Consequently, expectations are confined to the proceeds from the asset sales that are already underway, which amount to less than ₹5,000 crore in FY21. “Currently, we have not factored the (renewable energy stake) sale, which is the major difference between our FY22E debt estimates of Rs39,900 crore and management’s target of Rs25,000 crore. Our estimates capture debt repayment from Rs4,700 crore asset monetization,” analysts at Jefferies said in a note.
On the positive side the company’s efforts to optimize operating earnings are bearing results. Operating earnings adjusted for divested units rose 9% in FY20 and thanks to fall in fuel prices, losses at the Mundra ultra mega power plant reduced considerably.
As a result, its debt servicing capability saw some improvement. Net debt to Ebitda softened from 5.28 times in FY19 to 4.7 times in FY20. According to analysts at Edelweiss Securities Ltd, the company plans to restrict capital expenditure to available cash flows, which should cap borrowings.
Even so, the company can see notable improvement in earnings only when it reduces debt substantially and plugs the losses at the Mundra power plant. While two states have agreed to alter tariffs, amendments to contracts are delayed by lockdowns. Progress on this remains vital for the stock.
“Tata Power (stock) does look attractive but we await further steps on the monetization front and the company to come out of the current situation without stretching debt,” Motilal Oswal Financial Services Ltd said in a note.