Apex court disallows rise in imported coal tariff, though awards compensation for lack of domestic coal

In stark contrast to the judgement of the Appellate Tribunal of Electricity and Central Electricity Regulatory Commission, the Supreme Court ruled against allowance of tariff revision for increase in coal prices imported from Indonesia to both Tata Power and Adani Power for their power projects at Mundra.

The Supreme Court has however allowed awarding a tariff revision for higher fuel cost incurred due to non-availability of domestic coal. The Court has taken recourse to change in government policies (construed as change in Indian Law) that restricted supply of domestic coal and allowed imported coal substitution to be compensated under competitive bids. The fine print of the order makes little change to our interpretation for Tata Power, though it brings relief for Adani Power as not all PPAs will be denied compensatory tariff.

We highlight that Adani Power had recognized compensatory tariff of Rs14.6 bn for 9MFY17 (Rs30 bn for FY2016) against EBITDA of Rs54 bn for 9MFY17 (Rs85 bn in FY2016). Tata Power on the other hand did not recognize any compensatory tariffs but had an average under-recovery of Rs9 bn or Rs0.5/kwh for 9MFY17 (Rs7 bn or Rs0.3/kwh for FY2016) against EBITDA of Rs5 bn for 9MFY17 (Rs11.3 bn for FY2016).

Tata Power will have to seek alternate loss mitigating factors; Adani Power goes back to CERC

Tata Power will likely look for alternate loss mitigating factors such as (1) looking for fuel sources that are more cost competitive, (2) maintaining an optimum generation level to recover capacity charge without losing too much on fuel cost under-recovery, (3) utilizing the losses to set-off against alternate income to minimize overall tax incidence, and (4) re-financing of debt and the appreciation of local currency that will further help the overall loss equation.

Adani Power while adopting loss mitigating measures listed above will seek relief for compensatory tariffs due to poor availability of domestic coal for sale of power to Haryana (1,424 MW). The same principle will be applicable in the case of Tiroda and Kawai where the company had to resort to coal imports. It remains unclear on the sustenance of compensatory tariff, as domestic coal availability has improved since the government policy released in 2013.

Downgrade rating on Tata Power to REDUCE, maintain SELL rating on Adani Power

We lower rating on Tata Power to REDUCE (from ADD) with a revised target price of Rs80/share (from Rs87 previously). The sustained earnings drag from Mundra UMPP prompts our rating downgrade. We do concede that lowered generation cost and potential tax credits for Mundra UMPP, could help alleviate our concerns on fuel cost under-recovery. Upside risk to our call and target price also emanates from potential value unlocking of the holding of Tata Power in its parent company Tata Sons. Our target price would have declined more drastically by Rs15/share on account of the revision in fair value of Mundra UMPP, but for the upward revision of Rs7/share in value of cash and investments that are now valued at Rs30/share.

We maintain our rating and target price on Adani Power, as the SC verdict refers back the quantification of compensation under 'change in law' for non-availability of domestic coal.

Source : Equity Bulls

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