(The following statement was released by the rating agency)
Dec 11 -
Summary analysis -- Tata Power Co. Ltd. --------------------------- 11-Dec-2012
CREDIT RATING: BB-/Negative/-- Country: India
Primary SIC: Electric Services
Mult. CUSIP6: 876566
Credit Rating History:
Local currency Foreign currency
24-Aug-2007 BB-/-- BB-/--
02-Feb-2005 BB+/-- BB+/--
Rating Rating Date
US$300 mil 8.50% nts due 08/19/2017 BB- 24-Aug-2007
The rating on Tata Power Ltd. reflects the company's "aggressive" financial risk profile,
high debt leverage, exposure to counterparty risk, increasing exposure to competitive generation
projects, and residual completion risk at its Mundra coal-based generation project. These
weaknesses are offset by our positive outlook for electricity demand in India, Tata Power's good
operating efficiency, and the strong competitive position of the company's core licensed
In our view, Tata Power's financial flexibility is likely to remain under pressure over the
next six-nine months because the company has breached a debt-to-equity ratio covenant on loans
to the Mundra project. Any consequent curtailment of loans to the project will increase Tata
Power's project expenses because the company would likely have to fund the construction of the
current disbursements from project facilities have not been curtailed. If disbursements continue
as scheduled, we expect Tata Power's ratio of funds from operations (FFO) to adjusted debt to
remain at 10%-12% over the next 18 months. In our view, Tata Power is also likely to receive
waivers on the covenant breach from lenders to the project.
The Mundra project exposes Tata Power to a risk that coal prices could increase because the
company can only partly pass fuel costs on to customers. Tata Power's stakes in coal companies
provide a natural hedge against higher coal prices and support its cash flows. Nevertheless, the
hedge does not fully eliminate the company's exposure to coal price volatility. Tata Power's
cash flows from the Mundra project and its coal companies could decline on a consolidated basis
if coal prices fall. The ability of the Mundra power plant to operate using blended fuel with
low-calorific-value coal may reduce some of this risk. Tata Power is negotiating with bank
lenders a mechanism to include the cash flows from its coal companies in the calculation of
financial covenants for loans to the Mundra project.
Tata Power's stable generation and distribution operations in the Mumbai license area, a
significant reduction in project construction risk at its Mundra project, and the commissioning
of the Maithon project support our assessment of the company's business risk profile as "fair."
The company has completed more than 92% of the Mundra project ahead of schedule and largely
within budget. However, the re-alignment of a rail corridor has reduced availability from a
second unit at the company's Maithon project, which could temporarily weaken cash flows from the
project. Nevertheless, the plant's current output is sufficient to meet the company's
obligations under power purchase agreements. The company is likely to sign further such
agreements once the rail corridor is aligned.
Tata Power benefits from high domestic electricity demand as a result of a large power
deficit. Returns from the company's 100 megawatt merchant capacity have been strong. Tata
Power's low cost of power relative to other private power providers, its payment security
mechanism, and the domestic power deficit partly offset the impact of the weak credit profile of
the company's customers (state power utilities).
Tata Power also benefits from a favorable tariff revision by the Central Electricity
Regulatory Commission for the company's centrally regulated projects. A 29% increase in tariffs
for Tata Power Delhi Distribution Ltd. (TPDDL)--Tata Power's regulated distribution business in
Delhi--went into effect in the fiscal year ending March 31, 2013, and will help Tata Power
recover some past fuel costs. Moreover, from January 2012, the company has been able fully to
pass through TPDDL's fuel costs. Nevertheless, Tata Power is exposed to some regulatory risk in
respect of the Mumbai license area and TPDDL.
In our view, Tata Power's liquidity is "less than adequate," as defined in our criteria. The
company's sources of liquidity are sufficient to meet its needs over the next 12 months. Our
liquidity assessment is based on the following factors and assumptions:
-- We expect the company's liquidity sources to amount to about Indian rupee (INR) 87
billion over the next 18 months including cash and cash equivalents, FFO, undrawn credit
facilities, and additional debt as required to meet capital spending needs.
-- We expect Tata Power to have steady recurring cash flows, with FFO averaging more than
INR40 billion per year over the next two-three years.
-- Uses of liquidity include about INR87 billion in the next 18 months for capital spending,
debt maturities of INR22 billion, working capital needs, and dividends.
Tata Power has good banking relationships and strong standing in the credit
The negative outlook reflects our view that Tata Power's cash flows and financial risk
profile could weaken. However, we believe that the company is unlikely to engage in large new
capital spending or debt-financed acquisitions involving significant cash outlays over the next
We could lower the rating if Tata Power is unable to secure a waiver from its lenders
following its covenant breach. We could also lower the rating if increased spending resulting
from the Mundra project or another cause were to substantially weaken Tata Power's financial
risk profile. A ratio of FFO to adjusted debt of less than 10% on a lasting basis would indicate
We could revise the outlook to stable if Tata Power secures a waiver from its lenders and
construction at the Mundra project continues as planned and within budget. We could also revise
the outlook to stable if the company faces no material business deterioration and maintains its
financial risk profile, such that FFO to adjusted debt remains at 10%-12% on a lasting basis.