The Supreme Court (SC) ruling on April 11 that power generation companies will not get any compensatory tariff to cover the surge in imported coal prices has given a jolt to power stocks. While Adani Power has lost 29% of its market value, Tata Power has erased 7.75% of its m-cap.
Adani Power and Tata Power were seeking compensatory tariff on grounds that regulatory changes in Indonesia in 2010 led to an increase in Indonesian coal prices, adversely affecting their coal sourcing costs. After almost a decade-long tussle, the Central Electricity Regulatory Commission (CERC) came out with a compensation formula in December 2016 that allowed the companies to recover the increase in costs. But the apex court's ruling has now nullified that order.
The impact is likely to be more adverse for Adani Power which has been recognising the compensatory tariff in its books since FY13. Over the past three years, it has booked revenues worth ₹3,619 crore as compensatory tariff. As on Q3FY17, compensatory tariff receivables stood at ₹8,820 crore, that is 116% of the company’s reported net-worth as on H1FY17.
The ruling has dealt a body blow to the already over-leveraged company. Data from Ace Equity shows that the company had ₹53,051 crore of consolidated debt at the end of FY16. Over the past three years, its debt to equity ratio has stayed in the range of 7x-8x. As on FY16, interest costs accounted for 68% of its operating profit with the interest coverage ratio hovering just a shade over 1x.
Analysts reckon that Adani Power will have to take a write-down on the compensatory tariff revenues. Given its stressed book, they feel the power generation major may have to tap into the cash flows of other Adani group companies to beef up its net worth in the event of a write-down. Not surprising that Adani Ports & Special Economic Zone and Adani Transmission stocks fell 5% and 10%, respectively, on the day of the ruling.
Credit rating agency CARE, in a note stated that after reporting cash losses for three consecutive years (FY13-FY15) and only a marginal profit in FY16, promoters and group companies infused cash into Adani Power by way of equity and subordinated unsecured loans. During FY17, Adani Power allotted 52.30 crore equity shares to the promoter group through a preferential allotment, resulting in an equity infusion of ₹1,700 crore for meeting its debt servicing requirements and other general corporate purposes.
The counsel arguing in SC on behalf of NGOs protesting against the power project squarely put the blame on Adani Power’s aggressive bidding for the Mundra project back in 2008 and not the surge in Indonesian coal prices. According to the counsel, Adani won the tender with the lowest bid and an offer to keep the prices free of escalation in 2008. He further pointed out that the company voluntarily decided to keep the prices fixed in order to be competitive and was, hence, awarded the contract. So, it cannot now, in the guise of being affected by force majeure, hike tariffs.
The only silver lining for Adani Power is that SC has allowed it to claim compensation for higher costs which were incurred as a direct result of a shortage in domestic supplies or a change in Indian regulations. Following which the CERC granted relief to Adani Power to the extent of the domestic levies applicable on imported coal. But analysts reckon that it is only a partial relief as the CERC ruling only pertains to domestic taxes. “It is a partial relief of ₹250-₹300 crore and that doesn't offset the impact of the SC ruling,” points out Rupesh Sankhe, senior analyst at Reliance Securities.
In short, Adani Power will have to live with the shock for some time to come.