Tata Power has reported a consolidated net loss of Rs 246.9 crore in the quarter ended March 31, mainly due to a payment for “exceptional item” under a contractual obligation.
Anil Sardana, MD, Tata Power in an exclusive interview to CNBC-TV18’s Kritika Saxena spoke about the FY17 performance, strategy in terms of what lies ahead for the company and impact of coal, solar GST rates on the company.
He said the company is all geared up for the rollout of GST on July 1.
Talking about the GST rates on coal at 5 percent, he said coal cost will be a pass through for most power companies but solar power will become expensive due to the GST rate of 18 percent. However, for their company, most of their solar projects got concluded before March 31, so they see no impact of the new GST rate on their tariffs.
The tariff benefits to their customers will not be seen till they go to the regulator next time since tariffs and distribution are all decided by the regulator. Tariff improvement will be seen only by mid-2018, he said.
With regards to the bids solar projects that could get impacted by GST, the number is as high as 10,000 MegaWatt, across the power sector, he said.
He also spoke about DoCoMo pay out and provisioning.
Below is the verbatim transcript of the interview.
Q: Before I go into the details and nitty gritties and what lies ahead, goods and services tax (GST) is the hot subject. There is going to be a positive impact for power companies like yourself. Coal will attract a 5 percent GST rate. Have you been able to estimate the kind of impact and the cost saving that will come in as a result of this?
A: For most of the power companies, coal typically is a pass-through. So, if at all, it is going to be an advantage to the customers. So, for us the advantage will be that we are a distribution company too and therefore, we look forward to our tariffs becoming better over a period of time because now it is down from 11 percent to 5 percent.
But at the same time, while the GST for most of the power items has improved, what has surprised us the solar GST. That has moved to 18 percent. That used to be zero. So that is a change that perhaps will make solar more expensive. And the worry is that right now, the projects which are in execution stage, they will have to bear this brunt because the change of law will take a long time for them to resolve. We are fortunate that most of our projects got concluded before March 31.
Q: So, there will not be that much of an impact.
A: So, for us, as Tata power, there will not be an impact, but for big projects which are not executed, the number is as large as almost 10,000 megawatts.
Q: 10,000 megawatt worth of projects being impact across power sector, not for Tata Power?
A: That is right.
Q: Is there a portion of this that Tata Power will get impacted by?
A: No, Tata Power will not get impacted because most of our projects are concluded before March 31.
Q: So, you indicated that there would be a benefit for customers, for your customers specifically. My first5 question, are you ready for the July 1 rollout and secondly, the revenue secretary was at CNBC yesterday. He had requested that the corporates must wait till the July 1 turnaround to pass on any effect, negative or positive to the customers. So, what would the timeline be? By when would customers see that benefit of tariffs?
A: First and foremost, we as a company are complete geared up to rollout GST from July First. So, we had advisors on board, we have done our changes in the enterprise and resource planning software. So, we are all set for July 1.
Second part that you asked was that when do customers truly see the advantage. That will be not until we to the regulator, next time because as you know, the tariffs and distributions are all determined by the regulator. Therefore, this cycle will virtually be a cycle that will end up towards the end of this financial year. And then you go to the regulator and then you get to see the changes.
Q: So, by when would you go to the regulator?
A: Not until 2018, middle.
Q: So, by mid-2018, there would be a tariff impact? How much would that be?
A: There will be a tariff improvement and if you assume for coal it is going to be down from 11 percent to 5 percent, in some of the projects the cost could certainly come down by Rs 0.10-0.15.
Q: By mid-2018?
A: That is right.
Q: Could that further keep coming down over a period of time, after it is executed? Is there a window for that?
A: No, because if the coal prices increase, yes then relative difference of the GST would certainly be an advantage. One has to wait and see as to how other aspects, other components of what forms the variable price, in terms of not just the coal, but also the fairing of coal, by trucks or by rail system, how would that get impacted because one has to see on a holistic basis. If that also goes down, then customer will see bigger advantages.
Q: Is there any more clarity that you need with respect to while you were getting ready for implementing GST? Is there more clarity that is required, specifically from a thermal electricity perspective?
A: Not from the components that become part of the entire generation or distribution, but yes, as things stand today, they are declaring the rates for many services. The goods part are becoming more clearer, the services part, one has to wait and see what will be the GST rates for some of those services. And once that all rolls out, then one will have an aggregate clarity in terms of what will be the final impact, negative or positive on customers.
Q: Let us talk about the earnings. You have had a good year. If I had to single out this quarter’s performance, there has been a net loss of Rs 247 crore, but that is largely because of an exception. Barring that, a Rs 389 crore of profit that you have seen. So, firstly, is there an exceptional item likely? Is there more payout that you have to make in lieu of Tat Docomo in the next few quarters? If yes, have you factored that in already?
A: First and foremost, as you rightly said, one is that this is Q4, but the other important part is this is also full year. So when we look at for power sector, we do not look at every quarter because this is long-term business. So, from an annual statement point of view, while we have provided Rs 650 off crore for Docomo that is likely to be a payout, what we have done, we have done two aspects. One is that based on the high court order, we realised very clearly that the Docomo payout will happen soon. So, that is one part that we have provided for.
Q: So, that is done now?
A: That is done now. There is no need for more provision. The second part that we did was that the Docomo impairment, that shares that we will acquire from Docomo will get impaired because the pricing is not going to be at the price at which we transact with Docomo. So, therefore, we have even provided for that because just for the viewers, we are buying these shares as per the agreement that Tata Sons had, at about Rs 58 which is 50 percent of the price at which these shares were originally bought by Docomo.
But now, we have provided in the books at Rs 11.70. So, we have even impaired the gap between them. So, we have completely provided for that so that that entire thing is taken care of. So, the yearly performance, if I do not consider Docomo, has been Rs 1,400 crore profit on the consolidated basis which is a very good performance considering the fact that we had high coal prices and we had more pain at Mundra.
Q: Since you mentioned coal pricing, coal profits and coal margins – coal margins for instance are at a three-year high. How sustainable is this given the fact that there is volatility in the sector? How sustainable is this and what is the target band that you want to remain in? Even if you look at coal margins for instance?
A: When you have to read Tata Power statements, you must read Mundra and coal investment as a natural hedge. We bought them together, we had a clear hedge between the two. Now, when the coal prices go up, Mundra has more pain, but the coal companies generate more profit. When the coal prices go down, coal companies provide low yield and Mundra therefore gets into a bit of a bitter situation.
It is a beautiful hedge and that exactly gets proven here, because if you look at the two together, when the coal prices, this last quarter and last half-year, went to about USD 18, actually coal companies generated more profit wheras Mundra had higher pain. So, it is a beautiful hedge. So, whenever you read Tata Power’s statement, there is a natural hedge that is provided in the system between the two.
Q: What is the net long hold position before we go ahead?
A: We are long on coal, we generate close to about USD 55 million at Kaltim Prima Coal (KPC) mines itself which is far more than what we can consume at Mundra and that is the reason why if the coal prices go much higher, we get disproportionately better income from coal mines. And this is an investment that we did together with Mundra only for that reason. And now, that is coming through in terms of the natural hedge, as I talked about.
Q: The one thing that has been important in the last few quarters is the compensatory tariff order by the Supreme Court. Can you break up the impact that is likely in the next few quarters or can you quantify for me, what is the exact impact that you will see and how will you now change your sourcing arrangements given the fact that Indonesia, as far as importing is a concern, would you look at geographies like US and Africa for instance?
A: Two things. First you asked about what is the impact of not getting a favourable compensatory order. The impact will be an under-recovery on the fuel side at about Rs 0.60 per kilowatt hour, if the present coal prices prevail which is quite large because we generate close to about 27,000 million units from Mundra. Therefore that is a severe impact. But as I said, our hedge with the coal prices will work. So, that is the advantage. If Mundra is going to suffer, close to about Rs 700-800 crore losses, we will have close to about Rs 650-700 crore income from coal companies. Therefore that natural hedge is going to work.
The second part that you said is in terms of the fact that how Mundra situation will be mitigated by coal. So, we had earlier, because of the previous order from Appellate Tribunal for Electricity (APTEL), a restriction that we must only buy coal from Indonesia. Now since we have no such restrictions and everything that had to happen has played out, we are now free to buy coal from wherever we believe we can get more competitive options.
So, in the past we gad looked at Columbian market, American market, African markets, where there is quite a lot of coal that is not being lifted by the Europeans or other customers who were long haul customers for them. That is almost like a distress sale that we are able to take advantage of. Now, in fact, since the time the order has come, we have already spotted coal in African shores which is going to come at much higher discounts than you can normally get.
Q: What is the current discount that you are working with right now?
A: For reasons of non-disclosure, I cannot talk about those numbers today, but yes, those are at a higher discount which will mitigate a lot of under-recovery that I am talking about for Mundra.
Q: So, Africa is one option, US is one option. Any other areas?
A: Even South America is another option because Columbia has a lot of good quality coal and similarly, we will keep scouting in countries where they are not part of the arrangement that we have seen between Australia, Indonesia and South Africa where the coal is declared on a monthly basis and they all arrive at the same price which is normally a higher price.
Q: What about domestic coal sources?
A: Domestic coal is now an option as you have seen the linkage policy that has been announced last week. However, the contours of that and the rules related to that are yet to be announced, but it will be auction system which will be very transparent.
Q: And you are open to bidding for high grade domestic coal?
A: We will look at all those options from time to time? Today, as it stands, even with the prices that prevail, domestic coal is not a competitive option for us. The cost of coal that we are able to get from Indonesia and from other sources through shipping arrangement is much cheaper than getting the coal through long-haul because as you know, coal, if taken from the eastern coast, whether it comes by all-sea route or it comes by all-rail route is going to be more expensive to Mundra than the options that we get from Indonesia or from other sources.
This is particular because shipping is at the lowest price today. Globally, shipping offers the most competitive pricing today and that is why, today, at this stage, I would say imported coal prices are way too more competitive compared to domestic coal.
Q: Let me ask about debt. You have maintained a debt target of two, if I am correct. What is the timeline that you are giving to yourself? By how much can we look at bringing down debt? Can you give me some figures as to what you are working with in terms of 2018 or even a 2020 target if you can?
A: Let me start by saying the normative debt levels for this sector are 2.33.
Q: Debt to equity ratios.
A: That is right. 2.33 as the debt to equity ratio. Since we have gone higher, when we particularly did the large acquisition last year, we did that through debt instrument. We did not have any equity from shareholders at that time. So, during the current year, our plan is that we will do two things. One, try and dispose off non-core assets which are there for a long time that we had retained within ourselves, try and see as to what we can fetch. There are other options also that we are exploring which we will tend to do during the 2018 period itself.
Q: What are the options?
A: There can be a lot of options. You can always go back to shareholders. You can explore options in terms of how you can look at the other assets that exist within the system as to what structuring options you pursue.
Q: Would that include reducing cross holding across group companies? That is something that has been discussed.
A: That is not my subject. That is the subject of Tata Sons. But I hear the current new Chairman talk about that more often. So, that is the agenda that they will pursue. But as far as the company is concerned, it will look at its non-core assets, it will look at its other core assets where it believes it can get value for money and we will therefore look at those options to try and go below the normative level of the sector and go below 2.33.
