Coastal Gujarat Power merger with Tata Power by February-end

Coastal Gujarat Power (CGPL), the wholly owned subsidiary of Tata Power, turned cash-positive in the October-December quarter of 2020 after fuel under recovery reduced further to Rs 0.32 per unit from Rs 0.40 per unit a year ago on lower imported coal prices. Going forward, the merger of CGPL with Tata Power expected by February-end will provide Rs 10,000-crore tax break to the parent over several years.

Over the last 10 years CGPL has made cumulative losses (ex-impairment) of Rs 9,400 crore till FY20 on aggressive bids and adverse coal and currency movement. The tax break is expected to be value accretive for Tata Power as its profitability will improve on deleveraging and asset divestment gains.

CLSA Securities, in its report on Tata Power, said the company will host a shareholders meet this month to approve of the merger of its subsidiaries, Coastal Gujarat Power (CGPL) & Tata Power Solar (TPSSL) into the parent. “CGPL will provide Tata Power with a huge tax break of up to Rs 10,000 crore over multiple years. With NCLT approval for its new structure, we raise our EPS 16%-25% on tax breaks due to merger,” CLSA report said.

CGPL saw 16% y-o-y growth in Ebitda to Rs 302 crore in spite of an 8% y-o-y fall in revenue to Rs 1,692 crore. Reduction in losses in CGPL led to positive net PAT. Losses in Q3FT21 fell by Rs 69 crore to Rs 95 crore on the back of subdued coal prices.

The average prices of coal during Q3FY21 were $43 per tonne as against $48.6 per tonne a year ago. Fuel under-recovery stands at Rs 0.32 per unit in Q3FY21 against Rs 0.40 per unit a year ago. CGPL’s long-term debt comprises only Rs 3,790 crore of bonds and debentures.

Analysts believe that going ahead Tata Power’s focus on consumer facing business will reduce its exposure to businesses facing imported spot coal, such as Mundra, that have dragged the overall return on capital employed, and can present monetisation opportunities in future.

Morgan Stanley, in a report, said that Tata Power is working towards a healthier balance sheet and stronger return ratios. The focus is on increasing exposure in the regulated business that is transmission and distribution, ramping up the asset-light consumer-facing businesses, and developing the renewable platform by recycling capital.

“Tata Power’s exposure to businesses facing imported spot coal, which have been a drag on overall RoCE, will go down incrementally. If its foray into some complementary consumer-facing businesses is successful, it could present interesting long-term monetisation opportunities, in our view,” Morgan Stanley report said.

CGPL fully paid the bank loans of Rs 4,150 crore and its long term debt now only comprises of Rs 3,790 crore of bonds and debentures.

As of December 31, 2020, Tata Power’s net debt reduced by 17.19% YoY to Rs 36,363 crore from Rs 43,915 crore a year ago. The net debt to equity stood at 1.49 times, while the weighted average cost of borrowing was 7.8%.