Adani loses nearly all its Mundra investment

Published by MAC on 2017-09-05
Source: BloombergQuint

Adani Loses Nearly All Its Investment On Mundra Power Plant

Sajeet Manghat

BloombergQuint

September 4 2017

Adani Group has lost nearly all its investment in the debt-ridden Mundra thermal power plant, the country’s largest coal-fired project, even as it looks for a strategic investor for the asset.

The Gautam Adani-led ports-to-mining conglomerate will transfer the 4,620-megawatt plant to its newly created subsidiary for an equity value of Rs 106 crore, according to its stock exchange filings. That compares with at least Rs 6,000 crore the group invested on the project, two analysts tracking the company said requesting anonymity. Adani Power Ltd. didn’t respond to BloombergQuint’s emailed queries on its investments in the Mundra project.

The power plant accounts for nearly half of Adani Power’s Rs 50,000 crore debt as of March, according to its filings. The company decided to transfer the project to a step-down subsidiary, making Adani Power the holding company for the group’s power assets. The proposal comes up for shareholder approval on September 20 through the National Company Law Tribunal.

Troubles for the project mounted after the Supreme Court in April didn’t allow the company to increase tariff to compensate for the higher price of coal imported from Indonesia. It relied on imported coal for more than 60 percent of its fuel requirement. Adani Power wrote off more than Rs 4,300 crore it had accounted for as compensatory tariff in the last two years, according to its disclosures.

The group is trying to ring-fence Adani Power, which has 10,480 MW operational capacity, from the Mundra plant. It hopes to sell a majority stake in the new entity, Adani Power (Mundra) Ltd., to a strategic investor, the exchange filing said. It will be 99 percent owned by Adani Power and the rest by Adani Power (Jharkhand) Ltd.

The project will be transferred on a slump-sale basis to the new company, which will issue 10.6 crore shares of a face value Rs 10 each, giving it an equity value of Rs 106 crore, Adani Power disclosed in its filing. Here’s how the company worked out the valuation.

Mundra plant has an enterprise value of Rs 22,475 crore. Its debt stands at Rs 21,707 crore. Factoring in cash of Rs 338 crore, the valuation works out to Rs 106 crore.

The transaction will not have any impact on any of the shareholders since it is an internal transfer to the subsidiary, said chartered accountants BSR & Associates, which prepared the valuation report.

Adani Power will turn from a power generating company to an entity to route investments into new power projects. The asset transfer will allow the company to source its funding more efficiently for capacity expansion or acquisitions, Adani Power said.

Of the 16.60 metric tonne per annum of coal required, Mundra plant was expected to source 10.2 MTPA from Banyu mines in Indonesia. For the remaining 6.4 MTPA, it has a fuel supply agreement with subsidiaries of Coal India Ltd and was allocated the Jitpur block in Jharkhand.

The Mundra project has long-term power purchase agreements for 80 percent of its capacity with Gujarat and Haryana power distribution utilities and intends to sell the remaining 20 percent in the spot market.

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Port City Of Mundra Is Losing Its Mojo

Sajeet Manghat

BloombergQunit

22 June  2017

India’s two largest thermal power projects face the risk of turning unviable as costlier imported coal and inability to hike tariffs have left Adani Power Ltd. and Tata Power Ltd. saddled with losses.

Built at a combined investment of Rs 40,000 crore, the projects in Gujarat’s port town of Mundra have been under financial stress as prices of coal at Indonesian mines have nearly doubled since they were planned. Worse, the Supreme Court rejected the companies’ bid to hike tariffs to compensate for the rise in costs.

The losses at Mundra have eroded Rs 4,000-crore net worth for Tata Power in the last three years, Anil Sardana, managing director and chief executive officer, Tata Power, told BloombergQuint in an emailed reply.

Adani Power had to reverse compensatory tariff worth Rs 4,364 crore it had recorded on its books till December last year, resulting in a significant erosion of its net worth as of March, a CARE Ratings report said. The company reported a loss of Rs 4,690 crore in the last financial year.

The Adani Group agreed to sell Mundra power at Rs 2.94 per unit, according to the Supreme Court order. Tata Power sells at Rs 2.26 a unit, its website said. While tariffs come up for renewal along with power purchase agreements after a stipulated time frame, the ability of companies to negotiate higher rates depends on prevailing conditions. Current trends do not suggest much room as solar power tariffs have fallen to a record low of Rs 2.62 per unit.

Domestic Coal Not A Viable Option

Since Adani Power and Tata Power relied on imported coal, setting up the projects in Mundra was logical. Especially, when the port also had one of the biggest automated coal-handling terminals in the country.

More than a decade later, the very basis of selecting the port has also made the plants unviable for using coal mined within India. While most coal mines are located in central and eastern India, Mundra is along India’s west coast.

“The landed cost of domestic coal is more than the cost of imported coal due to longer transportation route,” according to Sardana. Moreover, the quality of domestic coal is such that not more than 20 percent of it can be used as a blend in imported coal, he said.

Adani’s 4,620 MW Mundra project is the largest coal-fired thermal plant by installed capacity in India, followed by Tata Power’s 4,000 MW Coastal Gujarat Power Ltd., also in Mundra. While NTPC Ltd.’s Vindhyachal project in Madhya Pradesh has an approved capacity of 4,760 MW, only 3,760 MW has been installed so far, according to information on the company’s website.

Debt Overhang

Adani Power has the highest leverage among India’s power producers with a debt-to-operating income ratio of 8.24. Tata Power follows at 7 compared to a median of 4.99 for the sector, according to Bloomberg data.

Tata Power set up its Coastal Gujarat Power Ltd. ultra-mega power plant at an original cost of Rs 17,000 crore, with three-quarters of it coming from loans. The project’s debt stood at Rs 9,730 crore as of March, rating agency Crisil said in May. The company has infused nearly Rs 6,200 crore in equity, including Rs 1,800 crore in the last three years, to maintain the 75:25 debt-to-equity ratio and compensate for net worth erosion.

Debt taken from banks is the responsibility of Tata Power, Sardana said. “It can't just be taken off the books. Since the plant is generating EBITDA margins, it's being run and the amount generated is used for repaying interest and debt, as due.”

Coal prices have declined in the international market in recent times, but the plant continues to post losses due to under-recoveries as the cost of coal (about $58 free-on-board) is still higher than what ($30) was considered at the time of bidding for the project, said Sardana.

For Adani Power, Mundra contributes half the debt. The company has decided to transfer the project into a step-down subsidiary, helping transfer Rs 25,000-crore debt to the arm and making Adani Power the holding company for the group’s power assets.

The Mundra plant is incurring cash losses due to under-recovery of fuel costs as the tariff does not fully compensate the costs of producing power, an Adani Power spokesperson said in an emailed reply to BloombergQuint.

The plant meets fuel requirement largely through imported coal. Adani Power also has an operational fuel supply agreement with Coal India Ltd.

Adani Power said Mundra plant’s cost of generation is competitive even at higher fuel costs. Under the terms of various power-purchase agreements, the company can recover full fixed costs at 80-85 percent of plant availability, the Adani spokesperson said.

Tata Power is running its plant at a declared capacity at 80 percent to recover full-fixed tariff. Even at this declared capacity, the plant load factor availed by distribution companies is about 70 percent. The company is in touch with power buyers to increase it by 10 percent.

“If this happens, procurers will get 60 percent of margin which can add up to Rs 450 crore earning for buyers and about Rs 300 crore advantage to CGPL each year. We are pursuing this option and Rajasthan has already expressed interest,” Sardana said.