Tata Power: Lighting up lives - is part of a bigger agenda
A composite power company
Tata Power today is into the generation, transmission and distribution of power. In other words it is a composite power company, and growing in stature by the year. It is a mere 90 years young, and hence has a thorough grounding on the subject. But, after a perusal of the directors’ report, one would seriously wonder why they ever got into this business in the first place. The power sector is one segment which suffers from regulation at literally every point of operation. To add to the trials and tribulations, setting up a hydro unit or a thermal unit calls for considerable skills in planning, getting clearances, and in execution, and can cost a king’s ransom in capex. And, from the planning stage to the commissioning stage it literally takes eons. And, to top it all, Tata Power is today operating in literally every known power segment (save battery power and candle power). From hydro, to thermal, to diesel, to renewable energy sources such as wind energy, solar, geothermal energy, micro wind, and even variations called solar thermal and such like.
The myriad controls
The directors’ report is replete with the reports and the documentation that the company has to file with the Maharashtra State Electricity Commission (MERC) on APRs (nual Performance Review) and ARRs (Annual Revenue Requirement), the many battles that it has to wage with the MERC on its right to sell electricity and at what rate, and on the right of consumers to choose their electricity supplier, to the several decisions of the Supreme Court in the matter of jurisdictional rights of the regulatory authorities, on the interest that it can charge on outstanding dues. Its unending battles with Rinfra (Reliance Infrastructure) and BEST on tariffs and power supplies, and the appeals to the Supreme Court on the orders of the Appellate Tribunal on Electricity (ATE) on the rate that it has to pay or can charge for electricity that it draws or on what it supplies.
If that aint nutty enough it has appeals pending in the Bombay High Court on the report of the GoM of its right to supply power to Rinfra, to the petition it has filed with the MERC challenging the refusal of the Maharashtra State Load Despatch Centre to schedule power supply from Tata Power (Generation) to Tata Power (Distribution) to meet the load requirements of its consumers. The decision of the apex court on matters of pricing of power and the interest it can charge on delayed payments etc could significantly alter the income/expenditure account of the company post facto, and make for a mockery of the sanctity of the P&L account, and of the Balance Sheet. For example, the trade debtors schedule includes such sub--heads as Unbilled Revenue, Fuel Adjustment Account, and Tariff Adjustment Account. What is very unnerving in all this is that there appears to be no dispute at all on the pricing structure of the input costs of power companies. (Fuel input costs such as coal, oil and gas are controlled though). How can the law be so one sided on a matter of such import?
Brimming with hope
Yet the company is brimming with hope and has lined up a slew of new projects. It currently boasts a total installed capacity to produce 2,977 MW of power, comprising of 2,089 MW from coal/oil/gas, another 240 MW from thermal waste gases and production gases, 447 MW from Hydro power and Renewable energy sources of 201 MW. In other words almost 78% of the total capacity is linked to thermal power generation. The installed capacity is stated in one unit of measurement (MW), and the power that it produces it stated in another measure - million units (MUs). It generated 15,946 MUs of power in FY10, or a multiplier factor of 5.3 of the installed capacity.
Inspite of 12 generating units spread across five states, it is still basically a two product wonder. The prodigal two are the Trombay thermal unit with a thermal capacity of 1,580 MW, and the Jojobera thermal unit in Jamshedpur with a capacity of 428 MW. (The Trombay unit separately also has a hydro power unit with an installed capacity of 447 MW.) Together, the two thermal plants account for an installed capacity of 2,008 MW, or 68% of the total installed capacity of 2,977 MW. The power generated by the Trombay thermal unit is a multiple of 6.4, while the power generated by the Jojobera unit is a multiple of 7.
New projects include in-house power plants, and joint ventures, which will contribute a total additional capacity of 5,421 MW. This includes a super thermal plant at Mundra in Gujarat with a capacity of 4,000 MW and another thermal unit of 1,050 MW at Maithon in Jharkhand. Between these two, it adds up to almost the entire additional capacity on the anvil. But it is early days as yet to count on these units to add to the top line.
The directors’ report runs into an exhaustive 25 pages of verbose prose touching on all aspects of the company’s functioning, and on the industry that it operates in. The point here is whether anyone will have the gumption to read through this exhaustive presentation and make any sense of it at all, at the end of it. The report as a matter of fact is a fascinating compendium of what the electricity sector should not be about in the first place. The financial statements are another story, and runs into over 105 sheets, including endless pages of notes to the accounts which have bizarre implications. Even the accounting is a complex exercise involving entries not found in the financial statements of other industrial sectors.
The complex accounting
There are for example some eight types of statutory reserves in its books - which are required under the repealed Electricity (Supply) Act 1948 and Tariffs Regulations. The depreciation on its power assets are also provided as per the requirements of this repealed Act. If this Act has been repealed why does the company still abide by its regulations? (Electricity supply companies were originally bound by the dual factors of the provisions of the Electricity Supply Act and The Companies Act). What is incomprehensible here is that the depreciation provided on its computers acquired after April 1988 is on the basis of approval obtained from the Maharashtra State Government! This requirement makes the industry truly nuts! The investment schedule includes such investments as Contingencies Reserve Investments, and Deferred Taxation Liability Fund Investments.
So what do the financial statements have for us? The Tata Power that we know today is an amalgam of three companies - Tata Power, and the two power companies that merged into it - The Andhra Valley Power Supply Company, and the Tata Hydro Electric Power Supply Company. Given the plethora of controls that it has to operate under, the power industry doesn’t look too much like a sunrise industry from the very important profitability angle.
The performance perspective
The ten year performance perspective that the company has provided (from the financial angle) bears this out. It has consistently generated more power each year starting with the generation of 100 bn MUs in the base year FY01, to 160 bn units in FY10. Its gross fixed asset base has also consistently risen from Rs 50 bn to Rs 104 bn over the ten years. Similarly, operating income too, barring one year, has also consistently shown an increase. But the operating profit is another story. It peaked at Rs 12.8 bn in FY04, after which the bottom-line was in limbo over the next 5 years, before hitting a new peak of Rs 18.7 bn in FY10. The other not very encouraging revelation is that the revenue it generates is only a fraction of the gross block. In FY01 on a capex base of Rs 50 bn it could generate revenues of only Rs 34 bn. Some nine years down the road in FY10, on a capex base of Rs 105 bn the revenues toted up to Rs 71 bn. The caveat here is that the capex base in each year includes capital work in progress, and hence there will always be this anomaly to contend with.
But, on the flip side what is really very creditable is that inspite of the Tatas going real slow on increasing the share capital base (from Rs 1.9 bn to Rs 2.4 bn) to meet a part of the increased demand for funds, the company was able to limit the increase in borrowings from Rs 26 bn to Rs 59 bn. That is to say the borrowings to gross block ratio which stood at 0.5:1 in FY01 increased only marginally to 0.6:1 in FY10. But the lenders extracted their pound of flesh as the company had to part with huge chunks of the shares that it held in its group companies as collateral. (The holding of the Tatas in the company is a not very comfortable 36% of the outstanding equity base of Rs 2.3 bn.) This is one of the banes of the Indian private corporate sector. Since the promoter has to keep a wary eye on his holding, expansion schemes are perforce financed through extra large dollops of credit rather than through a judicious mixture of debt:equity, as the promoter is oftentimes unable to chip in with their share of the equity in the event of a further issue of shares.
The profit before taxes and statutory appropriations rose marginally to Rs 12.6 bn in FY10 from Rs 11.1 bn in the preceding year. But, this increase in profit was also partly due to fortuitous circumstances. The change in the fuel mix did the trick, but it also meant that it has to reduce the price at which it supplied power. But overall it was price positive by a mile. In FY09 other income (including profit on sale of investments) accounted for 57% of the pre-tax profit of Rs 11.1 bn. In FY10 the contribution of other income was less lustrous at 22%. So there was an increase in operational efficiency too.
Moneys socked away in investments
It has quite some moneys socked away as investments. The book value of investments stood at Rs 67 bn against Rs 54 bn previously. These investments are grouped under 6 heads of account, including any number of subheads under each head of account. The largest block of investments is grouped under 'investments in subsidiary companies' at Rs 36 bn, followed by trade investments at Rs 18 bn totalling to Rs 54 bn. These investments overall represent truly 'tied’ investments in the sense that they cannot be sold, and the company has to suffer them. The trade investments represent investments in group companies. It also has investments in group companies which are classified under 'Other Investments' but they are not very significant, in the context of the big picture. Overall it earned a dividend income of Rs 1.6 bn during the year on its investments, which is not exactly what the investment manager ordered, but that is precisely what it is. The dividends from its subsidiaries will take years to materialise, if at all.
The company has investments in 14 subsidiaries, with its big ticket investments being in the mega power units that are on the anvil. Its biggest subsidiary company investment is in Coastal Gujarat Power Ltd with an outlay of Rs 17 bn; followed by its dollar denominated Singapore based subsidiary Trust Energy Resources at Rs 5 bn. To add some ice and spice, it has 5 offshore subsidiaries among the 14 - three of which are dollar denominated, and two which are euro denominated. The combined book value of its investments in these firangi outfits is Rs 5.1 bn. One of the subsidiaries has a capital base of Rs 0.1 m, while another makes do with a capital base of Rs 0.3 m! Just maintaining such book entry companies operational on a yearly basis will be costing more than the paid up capital of these companies! The list of subsidiaries also includes Ratan Tata's old flame, the still extant and partly owned subsidiary, Nelco Limited, which appears to be muddling along.
Some inexplicable investments
In the consolidated accounts the company has furnished the brief financials of 20 subsidiaries - including what appears to be 6 subsidiaries of subsidiaries. There appears to be a fair sprinkling of investment companies in this list. Three of these are standouts - a classic study of their contrasting characteristics. Bhira Investments (the Mauritian subsidiary) has a capital base of Rs 41 m, negative reserves of Rs 4.8 bn, investments of the value of Rs 30 bn, total liabilities of Rs 35 bn, a turnover of Rs 569 m, and a net loss before tax of Rs 338 m. Bhivpuri Investments (the Cyprus subsidiary) has a capital base of Rs 41 m, positive reserves of Rs 11.8 bn, investments of Rs 20 bn, total liabilities of Rs 19.5 bn, a turnover of Rs 3 bn and a profit before tax of Rs 2.3 bn. Khopoli Investments (the Mauritius subsidiary) has a capital base of Rs 3 m, negative reserves of Rs 260 m, total liabilities/assets of Rs 17 bn each, NIL investments, a turnover of Rs 420 m, and a net loss of Rs 200 m. Between Bhira and Bhivpuri the total book value of investments is a sizeable Rs 50 bn. What do these investments represent?
If Khopoli is indeed an investment company as its name plate professes, then why does it have a zilch investment portfolio per se, and what exactly is the constitution of the humungous assets and liabilities that it boasts, the turnover that it generates, and that too on such a pipsqueak capital base? (Is this all a planned pattern or did it happen by chance?) Bhira and Bhivpuri between them control an investment portfolio of Rs 50 bn, out of a total investment portfolio of Rs 53 bn that the subsidiaries cumulatively carry in their books. There are also other exotica in the parent's portfolio, including Panatone Finvest an associate, in which the parent has invested Rs 5 bn and has a 40% ownership. That would infer that Panatone has a paid up capital of Rs 12.5 bn. (What's with a 40% stake please?) And pray, what is the status of this investment?
The bulge bracket investments in its power generating companies have as yet to bear any fruit and will take years to bring any succour to the balance sheet of the parent. But the point is that by spinning off such large investments into separate legal entities, the company is spared the task of having to present lopsided balance sheets, given the gestation period that such investments entail.
There are numerous other details too that one can touch on, but then it would tend to become long winding. But suffice to say that based on the available stats, this is not a share that should attract any interest among the discerning.
Disclosure: I do not hold any shares in this company, either directly, or under any non discretionary portfolio management scheme
This column Cool Hand Luke is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.