UPDATE 1-Tata Power mulls sale of investments, equity raising to cut debt

Tue Oct 22, 2013 8:17am EDT

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By Matthias Williams and Sumeet Chatterjee

NEW DELHI/MUMBAI Oct 22 (Reuters) - India's Tata Power may sell some investments and raise equity to help reduce debt, a top executive said on Tuesday, as expensive imported coal, below-cost power tariffs and a weak rupee weigh on its earnings.

The company, a unit of the salt-to-steel Tata conglomerate, has bled money from its flagship Mundra plant in western India, unable to pass along the high cost of imported coal to customers, despite a decision by a federal regulator in April paving the way for a tariff increase.

The case has underscored the regulatory uncertainty that plagues the investment climate in Asia's third-largest economy, in the grip of its worst slowdown in a decade, and the infrastructure sector in particular.

Comparing Mundra's financial troubles to a cancer eating away at a body, Tata Power Executive Director S. Ramakrishnan told Reuters the company was "mentally and financially" prepared to sustain Mundra's losses only until the start of March.

Standard & Poor's last month lowered Tata Power's long-term credit rating on weak cash flows, saying it could cut the rating again if liquidity weakens further or it faces difficulty in refinancing its debt in a timely manner. The current rating is a sub-investment grade B+.

Ramakrishnan estimated the company's consolidated debt at about 300 billion rupees, or $4.9 billion. A company spokesperson later clarified, saying the debt was 382.1 billion rupees as of the end of June. About 37 percent of its debt is in foreign currency.

"We are studying what are the various options available to us to improve the debt-to-equity situation so that the credit rating pressures are lesser," he said in a phone interview.

"Options include sale of investments, raising of equity -- all those are there. They are all under study. No decision has been taken," he added.

Tata Power's investments include holdings in sister Tata firms, including 17 percent of Tata Communications, valued at roughly $180 million, and shares in Tata Teleservices (Maharashtra) Ltd and Tata Consultancy Services Ltd .

Tata Power joins local rivals Lanco Infratech and GVK Power and Infrastructure in exploring options to raise cash to pare debt, as a weak economy and regulatory bottlenecks drag on the performance of power companies.

LIFE TO GET TOUGH

Chronic power shortages in Asia's third-largest economy force businesses to rely on expensive backup diesel generators to keep their offices and factories running.

Debt-strapped private power producers in India often lack fuel to run their plants. Many state-run electricity distributors are crippled by populist low-tariff regimes and are too broke to pay a viable price for power from utilities.

India's federal regulator recommended a tariff increase for Mundra, but Tata has yet to reach agreement with the states it supplies.

"We ideally would like to see a resolution of this by 1st March, 2014. We are mentally and financially prepared for that, and if we are pushed a little bit more, from then on, I feel life is going to be tough for us," he said.

Asked whether Tata would shut Mundra if it continued to run at a loss beyond March, Ramakrishnan said: "My view is no commercial business can run on the basis of sustained commercial losses, and our business is no exception."

Many Indians see cheap or free power as a right, not a privilege, and raising tariffs is especially difficult as the country gears up for a general election due by May.

State-owned electricity distributors across India have racked up massive debts after years of populist pricing policies, and losses from electricity theft and creaky transmission infrastructure. (Reporting by Matthias Williams and Sumeet Chatterjee; editing by Tony Munroe and Keiron Henderson)