Tata Power has fixed its rights issue price and ratio at Rs 60 and 7:50, respectively. The issue is expected to open on or before 31 March. This means that the existing investors who hold 50 shares as on 20 March can apply for seven shares at Rs 60. If the issue is fully subscribed, Tata Powerwill raise around Rs 2,000 crore. The company is trying its best to reduce the leverage on its balance sheet and a part of the proceeds of this issue would also be used to reduce its debt burden.
Though the rights issue will dilute the EPS and return on equity (RoE), analysts are bullish on it because it will help Tata Power bring down its debtequity ratio. In addition to the rights issue, the management is also making efforts to divest its non-core assets to raise money. Though certain approvals are still pending, its stake sale efforts in Indonesian mines are expected to materialise in May.
The recent Central Electricity Regulatory Commission (CERC) order, upholding the recommendations of theDeepak Parekh Committee, which was set up to determine the compensatory tariff for ultra mega power project (UMPP) in Mundra, is another positive factor. If the order is fully implemented, it will allow Mundra UMPP to pass 100% of the increased fuel costs, which would not have been possible earlier due to the fixed price power purchase agreements (PPAs). With greater clarity on Mundra, which was a major overhang, the risk-reward ratio is also becoming favourable for the company.
At current market price, Tata Power is quoting at a premium to its peers. However, analysts feel that this premium is justified because it the best stock with a high RoE and growth rates in the utilities segment. The improvement in balance sheet after the rights issue, Indonesian coal stake sale and relief due to CERC's order should help the company focus on its growth plans again. On the other hand, most competitors are still in the process of selling their best operational assets to reduce debt burden. Since the rights issue price is at a significant discount compared to the market price, existing investors should participate in it, while the new ones can wait for a price correction.
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