Tata Power's Q3FY19 results (Outperformer) - Indonesian DMO adversely impacted profits

Q3FY19 consolidated result highlights

• Mundra reported an under recovery of Rs0.95 per unit in Q3FY19 (vs Rs0.79 per unit in Q3FY18). Mundra availability was 85% in Q3FY19 (normative of 80%). As a result, Mundra UMPP’s reported a loss of Rs4.7bn in Q3FY19 (vs loss of Rs2.1bn in Q3FY18). 
• Volume of Coal sold came in at 14.6mt (+1.2% yoy). The Indonesia’s domestic coal obligation and rise in diesel prices have impacted the profits of coal mines adversely. As a result, profit contribution from mines was Rs2.6bn in Q3FY19 (vs Rs4.3bn in Q3FY18). Gross spread decreased to USD 14/ton in Q3FY19 (vs USD23.2/ton in Q3FY18). The decline in profit from mines was not compensated by decline in losses from Mundra UMPP (unlike other quarters)
• Standalone EBITDA/ adj. profit was Rs5.3bn/Rs176m. Cons. loss of Rs581m  (adj. for exceptional item) for Q3FY19 was significantly below our estimate of Rs3.0bn. Profit has been adj. for deferred tax liability   related to extension of PPA and Rs600m penalty on coal mines.
• Earlier, Supreme Court had directed CERC to examine PPA amendment issues and pass an order in 8 weeks for Mundra UMPP. The amended PPA has been approved by Gujarat. Tata Power will now approach CERC for approval of PPA’s
• During Q3FY19, Tata Power received extension of its PPA with BEST for another 5 years. We expect similar approval for its own area. Thus, this brings certainty of revenues from the MLA generation assets.

Key positives: extension of BEST PPA by 5 years

Key Negatives: Coal Supply at discounted prices under Indonesian domestic market obligation (Total impact of Rs900m during the quarter)

Impact on financials:  Reduce our earnings estimates for FY19E/FY20E by 36%/24% yoy to account for increased Indonesian domestic market obligation for coal sales; introduce our FY21E profit of Rs14.8bn

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, SC direction to CERC to consider amending the PPA’s increases the probability of a favourable outcome of tariff increase in favour of the company. The stock is trading cheaply at 1.0x FY20 P/B and 14.8x FY20 P/E.  We reiterate outperformer rating on the stock with a revised target price of Rs84/share