Tata Power's Q4FY19 results (Outperformer) - Mundra resolution awaits approval of states

Q4FY19 consolidated result highlights

• Mundra reported a fuel under recovery of Rs0.64per unit in Q4FY19 (vs Rs0.93 per unit in Q4FY18). Mundra availability was 97% in Q4FY19 (9m PAF of 75%). As a result, Mundra UMPP’s reported a loss of Rs2.9bn in Q4FY19 (vs loss of Rs6.0bn in Q4FY18). 
• Volume of Coal sold came in at 15mt (+10.3% yoy). Profit contribution from mines declined to Rs1.2bn in Q4FY19 (vs Rs3.0bn in Q4FY18) led by lower coal prices. Gross spread decreased to USD12/ton in Q4FY19 (vs USD24/ton in Q4FY18). During the quarter, the impact of Indonesia’s domestic coal obligation was negligible due to lower international coal prices. The decline in profit from mines was not compensated by decline in losses from Mundra UMPP in FY19.
• Cons. profit of Rs2.4bn (adj. for exceptional item) for Q4FY19 was  marginally below our estimate of Rs3.0bn. Profit has been adj. for write off of Rithala power plant and provision for tax settlement. Standalone EBITDA/ adj. profit was Rs6bn/Rs1.1bn
• 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 Gujarat (procuring ~50% of the capacity) has already approved the amendment in PPA’s. We estimate a relief of 30-50 paise/Kwh based on current coal prices.

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:  Reduce our earnings estimates for FY20E/FY21E by 20%/14% yoy to account for decline in coal prices

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.