Tata Power's Q3FY20 results (Outperformer) - Potential renewable monetisation key trigger for the stock

Q3FY20 consolidated result highlights

• Mundra reported a fuel under recovery of Rs0.32per unit in Q3FY20 (vs Rs0.91 per unit in Q3FY19). Mundra availability was 87% in Q3FY20 (vs 85%). As a result, Mundra UMPP’s reported a loss of Rs1.6bn in Q3FY20 (vs loss of Rs4.6bn in Q3FY19). 
• Volume of Coal sold from Indonesia Mines came in at 16.4mt (+12.3% yoy). However, lower coal prices led to reduction in profit from mines to Rs1bn in Q3FY20 (vs Rs2bn in Q3FY19). Gross spread decreased to USD9.6/ton (vs USD14.6/ton). Overall, the decline in profit from mines was compensated by decline in losses from Mundra UMPP. Mundra plus coal companies made an adjusted loss of Rs430m (vs loss of Rs2.1bn)
• Cons. profit of Rs1.9bn for Q3FY20 was below our estimate of Rs2.7bn. Standalone EBITDA/ adj. profit was Rs5.6bn/Rs207m.
• Tata Power has approached all the state DISCOMs for approval of amendment in Mundra PPA (Gujarat has already approved). However, the approval has been delayed. Now it is expected that the proposal for tariff hike will be taken up by Punjab and Maharashtra in next few weeks.
• Tata Power is in process of deleveraging its balance sheet and simplifying its company structure - Divestment of assets is expected to generate USD1bn over next 12- 18 months a) TATA SED transaction is expected to finalise in Q1FY21 b) Sale of Cennergi in next 3 weeks c) ITPC stake sale is under discussion d) pending inflow from stake sale of Arutmin. Besides, it’s looking to monetise its renewable assets in next twelve months.

Key positives: Acquisition of Prayagraj and successful bidder for CESU DISCOM (energy sale of 9BU in the DISCOM).

Key Negatives: Delay in decision by states for revision in Mundra tariff.

Impact on financials:  Reduce our earnings estimates for FY20E/FY21E by 8%/7%; introduce our FY22E estimates.

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 Cennergi is likely to materialise in next three months. Besides, renewable asset monetisation is likely to be finalized over next twelve months. The sale proceeds are being used to deleverage the balance sheet especially the Mundra Power debt. In addition, the amendment to CGPL PPA is expected over six to nine months.. The stock is trading cheaply at 0.8x FY21 P/B and 13x 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.