MOSL: TATA POWER| Annual Report Update (Neutral)-FCF -ve on shrinking WC release, rising finance cost

Tata power| Annual Report Update: FCF -ve on shrinking WC release, rising finance cost; Asset monetization should help; maintain Neutral

(TPWR IN,Mkt Cap USD2.8b, CMP INR72, TP INR75, 4% Upside, Neutral)

We analyzed Tata Power’s (TPWR) FY18 annual report. Our key takeaways:

• Underlying earnings (that is, PBT before exceptional and other income, but including PAT of JVs and associates) grew ~8% in FY18. The benefit of higher coal prices (net) and almost doubling of renewable energy (RE) business was largely offset by higher finance cost. Finance cost increased due to leveraged acquisition of RE business from Welspun (was for part of the year in FY17) and FX loss.
• The hedge between Mundra and coal mines continues to operate well. Combined EBITDA of Mundra and PAT of coal mining JVs grew ~10% in FY18 on higher coal prices.
• Net debt increased, though marginally by ~INR2b to ~INR485b in FY18, despite strong operating cash flow (including dividend). It was driven by (a) higher payments towards finance cost of ~INR47b against P&L finance cost of ~INR37b, and (b) capex of ~INR35b (v/s INR33b in FY17), which included ~INR4b for previous year capital projects. RE took major share of capex in FY18.
• TPWR’s working capital reduced further for the third consecutive year now, driven by lower receivables and recovery of regulatory assets (in both Mumbai and Delhi distribution). It has generated cash flow of ~INR47b from working capital release in the last three years.
• High trade payables at Mundra at ~145days of sales (unchanged) – primarily for coal payments for its coal mining JV, KPC – are also aiding cash flow.