UPPER : Upper Tamakoshi Hydropower Ltd, a hydropower company with a capacity of 456 MW, is currently facing a significant challenge in the form of its borrowing obligations. The company’s long-term borrowing stands at Rs 73,33,89,85,720 (73.3 Arba), while its short-term borrowing amounts to Rs 6,72,96,12,253 (6.72 Arba). This cumulative borrowing results in a total of 80.06 Arba, against a total equity of RS 5,40,74,75,554.94.
The company’s most recent Liquidity Ratio is reported to be 0.31, which is lower than the value of 0.36 recorded in the previous quarter. Moreover, the Debt Equity Ratio for the current quarter stands at 13.56, indicating a high level of leverage for the company. This situation highlights the need for a strategic intervention to address the issue effectively.
To curve out this problem, Upper Tamakoshi Hydropower Ltd is planning to issue the right shares amounting to RS 10,59,00,00,000, following a 1:1 ratio of Paid-Up capital. This proposed share issuance aims to alleviate the company’s financial burden and improve its overall financial position. However, it is prudent to thoroughly evaluate the company’s financial indicators before making any further investment decisions.
Therefore, it becomes essential to examine the current financial performance and ascertain the overall image portrayed by the financial statements.So before making any further investment let’s see what image financials are portraying.
As of Q-3, Upper Tamakoshi Hydropower Ltd has incurred a loss of 2.12 Arba. This loss can primarily be attributed to the significant finance costs the company has borne, which amount to 1.26 times the operating profit. The ratio of Finance Costs to Operating Profit (FC to OP) serves as a measure of the minimum operating profit required to meet the financial cost burden. Based on cumulative results up to Q-3, it is observed that the operating profit must increase by 26% to achieve a break-even position, where the company neither makes a profit nor incurs a loss.
In summary, the company’s financial performance until Q-3 indicates a loss of 2.12 Arba, primarily due to substantial finance costs that surpass the operating profit. To eliminate this loss and reach a neutral financial position, the operating profit must increase by 26% based on the cumulative results.
Here is the Same data of the previous year where Fthe inancial cost to Operating Profit was 1.34.
Let’s see year-to-year growth in the corresponding quarter for Revenue, Operating Profit, and Finance Cost. The thing to be looked at here is a raise in Finance cost in comparison to Operating profit, other than Q-3. In Q-1 & Q-2 Finance costs have surpass the impact of the growth of Operating Profit which is a red point from company’s Point of view
Let’s analyze whether issuing the Right shares will be beneficial for Upper Tamakoshi Hydropower Ltd. The company plans to issue shares worth 10.59 Arba, intending to use the proceeds to repay a portion of its 80.06 Arba loan. With this share issuance, the company will be able to repay approximately 14% of the outstanding loan, while the remaining 84% will still be pending. In simple terms, if the company repays 14% of its loan, it will experience a corresponding reduction of 14% in its finance costs. However, even with this reduction, the company will not achieve profitability. To be in a profitable position, the company needs to enhance its operating profit by at least 43%. In summary, issuing the Right shares will provide some relief by reducing the finance costs through the partial loan repayment. However, to achieve profitability, the company must focus on significantly improving its operating profit by at least 43%.
In essence, the key takeaway is that Upper Tamakoshi Hydropower Ltd will not experience an improvement in profitability unless it addresses its loan repayment obligations and enhances its operating profit. The issuance of Right shares will only be advantageous if it is accompanied by a substantial improvement in the company’s operating profit.
Therefore, the company’s path towards profitability necessitates the simultaneous actions of loan repayment and a significant enhancement in operating profit. Merely issuing Right shares and reducing finance costs will not be sufficient to achieve profitability. The focus should be on striking a balance between debt reduction and sustainable growth in operating profit to unlock the potential benefits of the share issuance.
So the crux would be Upper will not see up side in profitability unless it pay’s its loan and improves it’s profitability , the right share will be beneficial only If improvement in operating profit is see
