APTEL’s favourable judgment on Tata Power (TPWR) backed Resurgent Power Ventures’ (RPVPL) petition against UP Electricity Regulatory Commission’s (UPERC) order to reduce power tariff from the 1,980MW Prayagraj Power (PPGCL) by Rs0.14/kWh, and its approval of transfer of 75.01% ownership of PPGCL to RPVPL, is a welcome development. This will not only benefit Tata Power (holding 26% in RPVPL), but will also expedite the resolution of other stressed assets. As per our estimates, the acquisition will yield 15-17% IRR for RPVPL and will add Rs1.5-2bn per annum to Tata Power’s consolidated earnings (includes O&M income). We expect the development to add Rs4/share to the SoTP valuation; however, we have not yet included it in our estimates as we are awaiting clarity from the management on the timeline of the takeover post this judgment. Maintain BUY.
The plant was acquired by RPVPL under a debt resolution scheme carried by the lenders to the project. With this order, transfer of 75.01% ownership of PPGCL to Renascent Power (a wholly-owned subsidiary of RPVPL) is now likely to be completed in the next few months and we also expect plant operations to stabilise.
- PPGCL, earlier owned by JPVL, was classified as an NPA in 2017, after it failed to service its debt obligations. In a competitive bidding process held in 2017, RPVPL emerged as the successful bidder, with its offer to acquire 75.01% equity shareholding along with 100% preference shares of PPGCL and transfer balance 13.50% equity shares to existing lenders.
- Bid was at Rs60bn vs cost of Rs150bn; however, UPERC ordered the reduction in PPA tariff by Rs0.14/kWh (PPA tariff originally signed at Rs3.02/kWh). This was challenged by RPVPL at APTEL, which on 29th Sept’19, pronounced against the revision of the tariff, reinstating the original tariff of Rs3.02/kWh.
- We believe the order will also be useful in resolving the contractual issues of renewable energy projects under question in Andhra Pradesh and also expedite the resolution process of other stranded thermal assets. The fact the order has ruled that state commissions need to only verify whether bid was transparently conducted or not, eliminates any case of tariff revision by state commissions, which is out of their purview. The judgment also stated that subsequent reduction in PPA tariff, post the conclusion of the bid process by lenders of the project, amounts to change in the fundamental basis of the bid.
- The upfront payments to lenders will be Rs60bn post which Rs10bn will be further invested as capex; all financed with a D/E of 78/22. This is expected to earn an IRR of 15-17%, as per our estimates for RPVPL. However, for TWPR, additional benefit is expected as it will be doing the O&M for the plant which is expected to result in savings of ~Rs1bn p.a. Hence, TWPRs IRR is expected to be much higher.
- Maintain BUY:We maintain our BUY rating on TPWR with an unchanged target price of Rs87/share as we await clarity on the timeline from the management. Reduction in Mundra under-recoveries and further sales of non-core assets could trigger further upside.
Please find attached report.
Source: icicisecurities
