Tata Power has been taking steps that may reduce its debt significantly thereby offering some comfort to investors in tough times. The board has announced preferential issue and proposed InVIT of its renewable business. These steps have gone down well with the investors; the stock has gained 15% in the past one week.
The board has approved issuance of 49 crore shares to Tata Sons at Rs 53, 4% higher than the Tuesday’s closing price of Rs 50.9, aggregating Rs 2,600 crore. Though this will lead to 18% equity dilution, it will not affect earnings per share since the company will save on interest expenses. A major chunk of the proceeds will be used to reduce debt by nearly 6% from Rs 44,000 crore in FY20. Savings on interest are likely to boost the net profit by around 16%. The promoter holding will increase from 35% to 46% after the issue.
The proposed hiving off the renewable business will offer a bigger boost to the company’s balance sheet and sentiments of investors who have been less enthused with the high capex commitment in renewable energy projects and uncertain return profiles. Analysts expect nearly Rs 11,000 crore of debt or 25% of consolidated reduction through the proposed InVIT. In addition, it will also help in unlocking value for investors.
In FY20, the renewables business had a networth of Rs 8,300 crore and clocked operating profit before depreciation and amortisation (EBIDTA) and net profit of Rs 2,300 crore and Rs 76 crore respectively. Tata Power had undertaken a leverage buy out of Welspun Renewables for Rs 10,000 crore in 2016 which mainly owns wind and solar assets.
In addition, monetization of non-core assets in shipping, defence and overseas power assets will bring down the debt further. The company also has a stake in Tata Projects, an urban infra company.
These initiatives are expected to bring down the debt to Rs 25,000 crore or by 40%. The debt-EBIDTA ratio may fall to less than four times from 5.2 while the debt-equity ratio may shrink to 1.5 from 2.2 at the end of FY21. The stock is available at 10.5 times estimated FY21 earnings and 0.7 times the price-book value.
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