Tata Power’s Mundra project faces rupee headwinds

The Deepak Parekh committee’s recommendation for a higher compensatory tariff to Tata Power’s Mundra project will not be enough to absorb the 20% depreciation in rupee since early this year and the project will continue to bleed, say analysts.

Tata Power’s Mundra subsidiary – Coastal Gujarat Power Ltd (CGPL) — has a massive $1.7 billion of foreign loans. The company, besides, is also importing coal from Indonesia. With rupee depreciating to Rs 68 to a dollar, the Parekh committee’s recommendation to give a higher tariff of Rs 0.59 a unit may not be enough as the recommendation was based on Rupee at 55 to a dollar and coal at $79 mt.

The tariff hike is still not cleared by state governments.

In FY2014, the effective interest cost on CGPl’s loans will be around Rs 1,227 crore approximately and of this Rs 556 crore will go for repayment of forex loans, as per the minutes of the committee meeting.

The repayment on forex loans will rise substantially with the fall in rupee’s value as the company’s fund flow is not expected to be very healthy. The committee has therefore recommended that lenders should approach the RBI for reduction in interest rates, moratorium on principal payment for 2-3 years and elongation of loan repayment period to reduce the company’s hardship.

An email sent to Tata Power to seek their comments on the impact of rupee depreciation did not elicit any response.

As per the minutes of the committee report, the lenders told the committee that the project will have a good case for interest reduction if the company’s ratings improve after the approval of compensatory tariff. As of now, all loans to the project are frozen.

The project was awarded to Tata Power’s subsidiary Coastal Gujarat Power Ltd in December 2006. Later, CGPL entered into a power purchase agreement with Maharashtra, Gujarat, Rajasthan, Punjab and Haryana.  But since then there has been an unprecedented escalation in coal prices and a new Indonesian law which mandated coal to be sold to outsiders at a far higher price. The Indonesian law eliminated the discount of 30% over market prices assumed by CGPL in its bid, as per the report.

During the committee meetings, CGPL asked Indian banks to take a haircut on its loans and sought a moratorium on the payment of principal amount. But this suggestion was rejected by the banks saying that the RBI regulations do not allow of interest or reduction of the interest rate to the maximum extent possible. The matter will now be sorted by the RBI.

The project was financed with Rs 5,850 crore of rupee term loans and $1.726 billion of forex loans. The rupee lenders are charging an interest rate of SBI bank rate plus 280 basis points.

All banks have stopped disbursal of loans since July 2012 on account of perceived unviability of the project and CGPL arranged funding from promoters and other sources to bridge the gap.

Tata Power may have to go through regulatory process until it actually gets tariff relief in Mundra UMPP. Both the domestic and foreign lenders have capped the disbursement to the Mundra UMPP project to 83% of the sanctioned limits on account of the perceived unviability of the operations of the project in the present scenario.

 

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