Tata Power's Q1FY20 results (Outperformer) - Amendment in PPA awaiting decision from statesTata Power's Q1FY20 results (Outperformer) - Amendment in PPA awaiting decision from states

Q1FY20 consolidated result highlights

• Mundra reported a fuel under recovery of Rs0.55per unit in Q1FY20 (vs Rs0.92 per unit in Q1FY19). Mundra availability was 87% in Q1FY20. As a result, Mundra UMPP’s reported a loss of Rs2.5bn in Q1FY20 (vs loss of Rs4.3bn in Q1FY20). 
• Volume of Coal sold from Indonesia Mines came in at 15mt (+7.5% yoy). Profit contribution from mines declined to Rs1.6bn in Q1FY20 (vs Rs2.5bn in Q1FY19) led by lower coal prices. Gross spread decreased to USD14/ton in Q1FY20 (vs USD20/ton in Q1FY19). Overall, the decline in profit from mines was not compensated by decline in losses from Mundra UMPP in Q1FY20. Mundra plus coal companies made an adjusted loss of Rs1bn
• Cons. profit of Rs2.8bn (adj. for exceptional item) for Q1FY20 was above our estimate of Rs2.6bn. Profit has been adj. for expenses and income pertaining to past years. Note that the profit would have been higher if Zambia and Cennergi power plants were not classified as held for sales . Standalone EBITDA/ adj. profit was Rs6.1bn/Rs4.1bn
• Central Electricity Regulatory Commission (CERC), the apex regulator, has provided huge relief for Adani Mundra power projects. Given the similarity of cases, approval for a similar relief for Tata Power is likely after the company is able to secure approval from all procurers. Note that ministry of power had called a meeting of all the procurers (Gujarat has already approved) and the states are expected to arrive at a decision very soon.

Key positives: CERC granted relief in a similar case as Mundra UMPP

Key Negatives: Delay in approval of states for new modified power purchase agreement

Impact on financials:  Maintain our earnings estimates for FY20E/FY21E

Valuations & view

Tata Power’s efforts to deleverage the balance sheet by selling its non-core assets have started bearing fruit. After successful sale of stake in Tata Comm, sale of strategic electronics division and Tata Projects is likely to happen over next six to eight quarters. The sale proceeds are being used to deleverage the balance sheet especially the Mundra Power debt. In addition,  the recent order increases the probability of a similar order for Tata Power, providing a huge relief. The stock is trading cheaply at 1.0x FY21 P/B and 14x FY21 P/E.  We reiterate outperformer rating on the stock with a target price of Rs84/share. Key risk is delay in approval by the states of the amended PPA.​