Tata Power's Q3FY18 results (Neutral) - Initiated steps to sell non-core assets

Q3FY18 consolidated result highlights

• During Q3FY18, Mundra reported sequentially better plant availability of 79% than H1FY18 availability of 69% (vs normative of 80%) and PLF of 72%.  Despite rising international coal prices, the under recovery on coal was contained at Rs0.7/unit due to realignment of international coal prices with tariffs (in rising coal price scenario, escalation of tariff under PPA lags to international coal prices) and fuel cost optimisation. As a result, Mundra UMPP’s reported a loss of Rs2.1bn in Q3FY18 (vs loss of Rs2.8bn in Q2FY18 and loss of Rs2.4bn in Q3FY17). 
• Increase in coal prices led to increase in Coal mines (only Kaltima mines) profit contribution to Rs3.9bn (vs Rs2.5bn in Q3FY17). Gross spread (realisation minus cash cost) increased to USD 23.2 per ton(vs USD20 per ton in Q3FY17 and USD)
• During Q3FY18, Standalone revenue/EBITDA  increased by 3% yoy to Rs19.4/Rs5.3bn led by increase in fuel cost by 26% yoy (pass through) in spite of declining sales volume by 10% yoy to 2.8BU., other income increased sharply by 34% yoy to Rs2.7bn owing to higher dividends/interest income from subsidiaries. As a result, standalone PAT came in at Rs2.0bn
• Cons. profit of Rs3.7bn (adj. for exceptional item) for Q3FY18 was below estimate of Rs4.4bn. Profit has been adj. for a) deferred tax asset  of Rs3bn created on account of proposed sale of businesses b) Rs710m of disallowance of cost for Maithon (related to prior period)

Key positives: Increase in coal mines profitability; initiated steps to sell non core assets (Tata communications, Tata projects and SED)

Key negatives: Uncertainty on Mumbai License Area PPA

Impact on financials:  We have revised our earnings downward in FY18E/FY19E by 8%/4% for miss in estimates in Q3FY18

Valuations & view

We see no major rerating triggers in the next 12-18 months barring unlocking of value from non-core assets and listing of renewables portfolio. We believe the unlocking of value through sale of shares will be a one off event and timing of these events add to uncertainty.  As a result, we believe current valuations of 1.4x FY19E P/BV and 13x FY19E earnings offer limited upside. Maintain Neutral with a revised price target of Rs92 (valuing renewables portfolio separately at 8xEV/EBITDA).