MOSL: TATA POWER | FY17 Annual Report Update (Sell)-Optimized CGPL’s capital structure-Raising estimates

TATA POWER | FY17 Annual Report Update: Optimized CGPL’s capital structure; Raising estimates; Maintain Sell

(TPWR IN, Mkt Cap USD3.3b, CMP INR77, TP INR71, 8% Downside, Sell)

Post analyzing Tata Power’s (TPWR) FY17 annual report, we have raised our estimates. Key highlights:

CGPL gets INR45b quasi equity; another INR29b needed over three years

• CGPL’s (Coastal Gujarat Power, Mundra) EBITDA declined 58% YoY to INR5.4b in FY17, as fuel under-recoveries nearly doubled to INR0.58/kwh (INR15b). Finance cost declined 48% YoY to INR6.8b on conversion of INR45b in quasi equity. FCF generation improved due to a sharp increase in trade payables to 145 days, historical low capex of INR467m, and lower interest payments.
• We are raising estimates for CGPL, given higher fuel price increase by CERC (v/s our estimate) for escalable portion of fuel cost, lower PLF and a stronger INR.
• CGPL will require INR29b equity infusion or re-financing to meet INR20b debt repayments and fund negative free cash flows over FY18-20E.

Coal JVs are funding negative free cash flows (some of under-recoveries) at CGPL

• Coal JVs’ disclosure has improved. PAT grew ~5x YoY to INR6.7b and dividend payout was ~56% in FY17. INR3.7b dividend from coal JVs nearly offset the INR3.3b negative free cash flow (FCF) at CGPL. Coal prices are expected to drive ~40% PAT growth in FY18. We expect 100% payout by coal JVs w.e.f. FY18.

Delhi distribution: Strong FCF on WC release, but regulated equity is muted

• Delhi distribution is generating strong FCF on working capital release and a recovery of regulatory assets, but regulated equity growth is muted.
• Despite capex of ~INR8b in the last two years, Delhi’s reported regulated equity is broadly unchanged at INR11.6b in FY17.