Saddled with debt and uncertainty over one of its biggest plants Mundra, Tata Power has not had a good year. In fact, N Chandrasekaran, chairman, Tata Power was bombarded with questions over the twin problem at the annual general meeting in June this year. He reassured investors that the management is working on reducing debt, 35% of which is attributed to Mundra alone.
Even as coal prices fluctuate, Tata Power has been unable to pass on the price hike due to an existing agreement signed with five states. According to this, the company has to sell electricity to these states at Rs 2.26 per unit for 25 years, and can only partially pass on the fuel cost. Selling below market price has resulted in wider losses for its wholly owned subsidiary, Coastal Gujarat Power, which manages the plant in Mundra.
Along with its financials, the stock has also been battered. The stock price has corrected by a whopping 42% since October 2018, hitting a 52-week low of Rs 50.40 on August 21 this year. Just as it did with Tata Motors, the parent company has rushed to the rescue of Tata Power, buying shares worth 914 million in the first two weeks of September. The stock also responded positively, gaining about 14% over the past two weeks. After the recent acquisition, Tata Sons’ stake has gone up from 31.05% to 31.62%. Over the past four quarters, overall promoter holding has stayed at 33%.
Even as promoters are confident about a revival in earnings, analysts are not too sure. An Edelweiss Securities report states that the several uncertainties — Mundra resolution, new Indonesian mining norms, among others “could weigh on the stock’s near-term performance”. But they add that acquisition of the plant at Prayagraj, asset sale and the possibility of Mundra resolution could revive earnings, and thus, investor sentiment. In the meantime, they believe Tata Power’s valuation remains comfortable, trading near its 10–year average EV/EBITDA band of 9.2x for FY21.
That’s what mutual funds also seem to be excited about. Over the past four quarters, they have increased their stake from 6.81% to 11.73%. While SBI MF and Reliance MF have increased their holdings from 0.04% and 0.13% to 1.87% and 1.52% respectively, ICICI Prudential MF has reduced its stake from 4.71% to 4.30%.
Foreign portfolio investors (FPIs), too, have been selling, reducing their stake from 27.47% to 25.96% over the same period. The largest FPI, Matthews Pacific Tiger Fund, has kept its stake unchanged at 6.67%, whereas First State Investments ICVC — Stewart Investors Global Emerging Markets Leaders Fund has reduced its stake from 3.99% to 3.33%.