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Debt, be not proud

Tata Power has a way to ease the high interest burden in this capital-intensive, loan-hungry industry.

Over 10,000 mega watts. That’s the generation capacity Tata Power plans to add over the next five years— that’s over four times its current capacity of 2,400 MW. What’s daunting is the quantum of investment required. The good news for Chairman Ratan Tata, however, is that he has tied up funds for roughly half of that expansion programme— Rs 17,000 crore for a 4,000 MW ultra mega power project at Mundra in Gujarat; and Rs 4,450 crore for a 1,050 MW unit in Maithon in Jharkhand.

The company still needs an estimated Rs 22,000 crore to finance the remaining capacity addition. At Tata Power’s 89th annual general meeting last fortnight, the Chairman hinted at future public issues. “The funding of future projects will be financed through debt and special purpose vehicles (SPVs) that will be created for the various projects. Shareholders may be provided opportunities to participate in these SPVs.”

S. Ramakrishnan, CFO, Tata Power, says the company has tied up half of its funding. “So, the slowdown doesn’t affect us right now.” Tata Power sees the acquisition of coal mines in Bumi in Indonesia as a critical component of its strategy. Says Prasad Menon, Managing Director, Tata Power: “The search for coal assets will continue.

Wherever we can find coal we will acquire them (mines).” A shipping venture with Trust Energy, based in Singapore, is part of the game plan. “It takes away the volatility from our raw material prices,” says Ramakrishnan.

One worry for the Tatas, however, is the high debt component in its projects, of up to 75 per cent. Ramakrishnan isn’t too perturbed as power purchase agreements are 20-year contracts, a period during which the impact of interest costs evens out. Also, tariffs are structured in such a way that higher interest costs can be passed on to consumers.

The Tata power way

• Gaining more control over coal assets, via acquisition of mines in Indonesia, and transporting coal in its own ships to minimise price volatility

• Tariff structures in some projects structured in such a way that higher interest costs can be passed on to consumers

• Exploring opportunities in renewable segments like wind, solar and geothermal energy

Industry review

What is a slowdown like in a sector where there is huge demand? The sector has attracted investments of Rs 1.95 lakh crore in the first half of 2008—that’s 30.9 per cent of India Inc.’s total investments. An addition of 161 GW of capacity is needed in the 11th and 12th Plan periods—that’s a huge demand to be fulfilled. Surely all that data doesn’t hurt. So what does? As Prasad Menon, Managing Director, Tata Power, says: “We do not know when we can complete a project unless we have spoken to the vendors. Earlier, we could multiply the capacity of the project with some ballpark figure and arrive at a project completion date.

It is not possible any more.” There are different ways of responding to the situation where demand is huge but funds are tight. Reliance Infrastructure has tied up with Shanghai Electric to manufacture power sector equipment. None of the major power equipment suppliers is in a position to commit any new supplies before another four-five years from now.