Weaker rupee and weak Mundra for Tata Power *Rupee crisis comes at a time when imported coal-based Mundra project is in enough trouble already*
n early 2008, Tata Power<http://www.business-standard.com/search?type=news&q=Tata+Power> tied-up loans <http://www.business-standard.com/search?type=news&q=Loans> worth Rs 17,000 crore for the country's first ultra mega power project<http://www.business-standard.com/search?type=news&q=Power+Project> in Mundra <http://www.business-standard.com/search?type=news&q=Mundra>. The massive loan to build the 4,000 megawatt power project had also raised money from external commercial borrowings. This was a strategy adopted by many of its peers like Reliance Power, which raised Chinese loans, as well as Adani Power. Traditionally, power projects which have all their revenues tied-up in rupees only, stayed out of the forex exposures. But some private utilities broke the rule for two reasons. One of them was that many of them including Mundra ordered their equipment from foreign companies. Korean company, Doosan, supplied five units of 800 megawatt super-critical equipment. The second and the most important reason was the extremely attractive interest rates offered by ECBs. “There was a cap of 5% interest rate on ECBs. At that time, they were offering loans at 4% interest, while Rupee<http://www.business-standard.com/search?type=news&q=Rupee> loans came at 11%,” said Debashish Mishra, senior director at Deloitte Touche Tomatsu. *Good times & ECBs* All this while Rupee was trading at around Rs 45 to a Dollar. Added to that, the currency had been trading at around Rs 45-47 band for the seven years since. But now, the company is facing a crisis with Rupee hitting 68 to a Dollar, as Mundra faces a massive Dollar loan liability of $1.4 billion. Till June last year, Tata Power was sitting comfortably on these loans. The reason being that they had hedged their liabilities. When asked if they had hedged for Rupee at around 55-56 to Dollar in an interview then, the managing director Anil Sardana, had happily answered, “Yes, we are hedged,” he answered. That confidence, however, is lacking now. At the company's annual general meeting recently, Sardana was not as confident. Their 'safe' hedging strategy is also failing them. “The only option left is to go for more and longer hedges, against headwinds. Even if the company were to hedge all its forex exposures, costs of hedging will be phenomenal. The way it is going, there is no liquidity with the banks that is possible to hedge it with,” he said. The cost of hedging, Mishra said, comes to around 6-6.5%. Sardana says that if they go ahead and hedge at high costs, it will reflect on the tariffs. “It is to be seen whether consumers who will ultimately suffer will be able to absorb around 50 paise increase in tariffs,” he said. State electricity boards have been raising tariffs for consumers after they themselves landed in a financial trouble. But, they might choose not to buy expensive power, as more costs pile on. Now, even their former expensive hedges have failed. The Dollar loan could have been at Rs 6,300 crore if Rupee were at around 45 to a Dollar. At the current rates, however, it would convert to as high as Rs 9,500 crore. “Debt servicing at this rate will be a huge problem,” admitted Sardana. *Mundra in loss realm* This unprecedented crisis comes at a time when the imported coal-based Mundra project is in enough trouble already. From a flagship project during the construction phase, Mundra has become an asset that is fast eroding the company's networth. The outlook suggests huge increase in interest costs due to forex fluctuations, as the plant is making losses as it operates due to increased fuel costs because of changes in Indonesian laws. The new law, that came in two years back, compelled the company to price its imported coal at international prices. It toppled the company's well-planned strategy to control its fuel costs. It had bought stakes in three coal mines that belong to Indonesia, hoping to stabelise coal costs. Fuel costs account to around 70% of the total costs of producing power. This move has already impaired the asset twice. For the quarter ending January, 2013, Tata Power made a Rs 600 crore provision for possible losses from Mundra on its balance sheet. This was the second impairment which the company took, as it was impaired Rs 1,800 crore in the financial year ending 2011-12. This problem, however, looks close to being solved. The company's plea with the central power regulator, CERC, received a positive nod. The regulator had appointed a committee to decide the extent of tariff hike, which is known to be fixed at 56-58 paise per unit, as per reports. “This implies a jump in tariff of around 24% from the existing tariff of Rs 2.45 per unit. Whilst this will still not take RoE to 14% (cost of equity assumed for this project), it will definitely turn Mundra profitable and lead to positive stock reaction as the implied ROE on this new tariff is around 7%,” said a report by Ambit Capital. *Stock slips on Rupee worries* Tata Power's stock has corrected by 24% in the last one year. It has been under-performing the volatile Sensex by 27%, mostly due to the overhang of various issues in the power sector, and also its specific problems relating to Mundra. But the real worry for the street seems to come from the Rupee. Earlier this month, the company's stock hit a four year low, falling by 18% on the day its announced a Rs 114,7 crore loss for the first quarter. This was on the back of a forex loss of Rs 292.7 crore on realignment of liabilities due to weakening of Rupee, and higher finance cost of Mundra. “Measures now have to be taken at the country level,” Sardana said when asked about his comments on the Rupee crisis. It is over to the government now, yet again.* * -- CA. Rajesh Desai -- You received this message because you are subscribed to the Google Groups ""GLOBAL SPECULATORS"" group. To unsubscribe from this group and stop receiving emails from it, send an email to [email protected]. To post to this group, send email to [email protected]. Visit this group at http://groups.google.com/group/globalspeculators. For more options, visit https://groups.google.com/groups/opt_out.
