During the Conference Call held to explain 100% acquisition of Welspun Renewable Energy (Welspun), Tata Power’s MD stated that 1.1GW assets (i) would be operational by FY17 with 100% long-term PPAs; (ii) are expected to earn 14-16% ROE; and (iii) would be acquired largely through debt (EV of R92 bn, 1.5x BV). TWPR seems to be pursuing its long-term objective of increasing the share of renewable energy (RE) in generation portfolio. Though, in near term, this would increase its balance sheet risk, in our view.
Post acquisition, largest RE developer: TPWR’s 100% subsidiary will acquire Welspun’s assets aggregating to 1.14GW (1GW solar, rest wind). All operational (1GW) and under-construction (150MW) assets have 100% long-term PPAs in place and to that extent TPWR seems to have avoided execution risks. Over the call, TPWR’s MD explained that: (i) TWPR has an option to enhance capacity at select sites (500 acres of surplus land) and the EV is inclusive of such option value; (ii) these assets would earn ROE similar to its thermal plants (14-16%); and (iii) TPWR emerges as the largest RE developer in India with capacity of 2.3GW by FY17. Renewables energy would account for 20% of its overall capacity.
TPWR’s balance sheet already stretched: We estimate TPWR to pay 1.5x BV to acquire the assets and finance the acquisition largely through debt. We note that TPWR’s net D/E is 3.6x and premium paid on the buy would increase leverage to >4x. With other projects (Mundra UMPP, Delhi and Mumbai discoms) encountering cash flow challenges, we expect TPWR to resort to sale of strategic investments or raise equity in the near future or explore raising equity in the RE subsidiary (Tata Power Renewable Energy) through an IPO or stake sale.
Stock offers upside only on normalised earnings: We do not expect the acquisition to be earnings accretive in initial years, considering the funding structure. We also remain concerned on consistent collapse in rates of PPAs signed by RE developers (R4-5/unit) and sustainability of older PPAs signed at R8-9/unit.
Change in such PPA terms due to weak financial health of the SEBs and flux of RE projects present key risks to the acquisition economics. The stock offers upside only on normalised earnings, for which resolution of compensatory tariff for Mundra UMPP and marked improvement in cash flow at its discoms hold the key.