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Tata Power's Q2FY20 results (Outperformer) - Mundra tariff: States to decide in few weeks

Q2FY20 consolidated result highlights

• Mundra reported a fuel under recovery of Rs0.51per unit in Q2FY20 (vs Rs0.90 per unit in Q2FY19). Mundra availability was 71% in Q2FY20 (vs 65%). As a result, Mundra UMPP’s reported a loss of Rs2.6bn in Q2FY20 (vs loss of Rs4.7bn in Q2FY19). 
• Volume of Coal sold from Indonesia Mines came in at 15.4mt (+18.5% yoy). Profit contribution from mines declined to Rs2.8bn in Q2FY20 (vs Rs3.6bn in Q2FY19) led by lower coal prices. Gross spread decreased to USD11.6/ton (vs USD24.5/ton). Overall, the decline in profit from mines was compensated by decline in losses from Mundra UMPP. Mundra plus coal companies made an adjusted profit of Rs90m (vs loss of Rs1bn)
• Cons. profit of Rs3.7bn (adj. for exceptional item) for Q2FY20 was above our estimate of Rs2.7bn. Profit has been adjusted for tax related liabilities for past period of Rs1.3bn. Standalone EBITDA/ adj. profit was Rs6.0bn/Rs1.6bn.
• Central Electricity Regulatory Commission 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 the proposal for tariff hike is likely to be taken up by Cabinet of Punjab and Maharashtra in next few weeks.
• Divestment of assets is expected to generate USD1bn over next 12- 18 months a) TATA SED transaction is expected to finalise in next few months b)  Sale of Cennergi c) ITPC stake sale d) pending inflow from stake sale of Arutmin

Key positives: Punjab and Maharashtra to decide on Mundra tariff soon

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

Impact on financials:  Increased our earnings estimates by 11%/9% for FY20E/FY21E due to beat in estimates in the quarter.

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 CERC order (for Adani Power) 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