Tata Power's Q2FY19 results (Outperformer) - Supreme Court order; directionally positive
Q2FY19 consolidated result highlights
- Mundra reported an under recovery of Rs0.83 per unit in Q2FY19 (vs Rs0.70 per unit in Q2FY18). Mundra availability was 71% in Q2FY19 (normative of 80%). As a result, Mundra UMPP’s reported a loss of Rs4.6bn in Q2FY19 (vs loss of Rs2.8bn in Q2FY18).
- Volume of Coal sold came in at 13mt (-11% 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 Rs3.6bn in Q2FY19 (vs Rs3.7bn in Q2FY18). Gross spread decreased to USD 24.5/ton in Q2FY19 (vs USD26/ton in Q2FY18).
- Standalone EBITDA/ adj. profit was Rs5.7bn/Rs2.1bn. Cons. profit of Rs2.8bn (adj. for exceptional item) for Q2FY19 was marginally below estimate of Rs3.0bn. Profit has been adj. for income related to prior period and refinancing charges of Rs500m.
- Supreme Court has directed CERC to examine PPA amendment issues and pass an order in 8 weeks for Mundra UMPP. A high level powered committee constituted by Gujarat government has recommended compensation by way of pass through of energy charge with a cap adjusted for mining profits in Indonesia.
- Tata Power received Rs19bn from selling its stake in Tata Communications in the quarter. In addition, it has also approved the sale of Strategic Engineering Division and Tata Projects sale is likely to be concluded over next six to eight quarters. Further, Arutmin sale proceeds of USD245m are likely to be realised over next few quarters. The proceeds will be used to reduce debt.
Key positives: Favourable high level expert committee report on tariff revision for Mundra; Supreme court order to CERC
Key Negatives: Coal Supply at discounted prices under Indonesian domestic market obligation (Total impact of USD20m per annum)
Impact on financials: Reduce our earnings estimates for FY19E by 10%
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 proceeds are being used to deleverage the balance sheet. In addition, Supreme Court direction to CERC to consider amending the PPA’s increases the probability of a favourable outcome in favour of the company. Stock is trading cheaply at 1.0x FY20 P/B and 11x FY20 P/E. We reiterate outperformer rating on the stock with a target price of Rs88/share.​
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