Why A Renewables InvIT Is Critical For Tata Power’s Plan To Pare Debt

As shares of Tata Power Company Ltd. rose, tracking the equity rebound from pandemic-driven lows, investors also bet on the company’s plan to pare debt. But one key milestone for the planned deleveraging has missed the deadline.

The power generator planned to hive off its renewables portfolio into an infrastructure investment trust. The InvIT transaction would have slashed its Rs 42,454 crore gross debt by more than a fourth.

The binding agreement for the proposed InvIT was to get board approval by the end of February and the spinoff was expected by end of March, Praveer Sinha, managing director at Tata Power, had said in an interview with BloombergQuint.

The company missed that deadline.

The Economic Times reported earlier this month citing unnamed people that a proposed $2-billion investment by Malaysia’s Petroliam Nasional Bhd (Petronas) has been called off. And that the Indian company is now considering an initial public offering for its renewable unit.

In an emailed response to BloombergQuint, Tata Power said it is exploring various options, including InvIT, for its renewables business and “shall be able to comment once developments reach a stage of announcement”. The fundraise will depend upon the green business portfolio finally monetised and in any such initiative, the company would continue to engage with multiple parties, it said, adding that no final decision has yet been taken with respect to investors.

Shares of Tata Power tumbled more than 12% after the report. Yet, it’s still trading 245% higher from its November low of Rs 27.

Why A Renewables InvIT

Tata Power has been able to lower its debt even without the renewables InvIT. Its gross debt fell to Rs 42,454 crore as of December from Rs 47,552 crore a year earlier.

But renewables’ contribution to the operating income of Tata Power has remained flat even as the share of debt has risen nearly 5% in the last year. The renewables business had a gross debt of Rs 11,797 crore as of December. Carving it out into an InvIT would lower Tata Power’s gross debt to nearly Rs 30,600 crore.

An IPO wouldn’t offer that opportunity even though there’s frenzied interest among investors for green energy companies around the world.

Renewables Portfolio

Renewable energy contributes 20% of Tata Power’s operational capacity of 12,772 megawatts. Together with hydroelectric power, it comprises 31% of the portfolio.
Tata Power Renewable Energy has wind assets worth 0.9 gigawatts and around 1.7 GW solar capacity located in 12 states.
About 1.5 GW solar capacity is under construction.

Consolidated renewables business contributes a little over 8% to the top line of Tata Power given that much of the revenue still comes from the Mundra ultra-mega power plant.

Long-Term PPAs, Strong Returns

All its operational renewables capacity has a long-term power purchase agreement. 98% has a 25-year tenure, while the rest has 13 to 15-year tenure.

The weighted average tariff of the portfolio is over Rs 5.3 per kilowatt-hour, leading to strong overall returns, said rating agency Crisil. This lends high predictability and stability to revenue with low demand risk, it said.

Valuation

Tata Power s renewables assets at Rs 13,250 crore as of December 2020. And going by average industry valuation, the business trades at 6 times its Ebitda.

This multiple is higher than that for its peers like NTPC Ltd. but much lower than Adani Green Ltd.’s 100 times, said Rohit Natrajan, associate vice president, Antique Stock Broking. Renewable energy asset monetisation will come with benefits like improved credit scores, and lower cost of debt, he said.