MOSL: TATA POWER (Neutral)-Higher interest cost drags PAT-HPC recommendations can provide relief

Tata Power: Higher interest cost drags PAT; HPC recommendations can provide relief; Maintain Neutral

(TPWR IN, Mkt Cap USD2.9b, CMP INR78, TP INR72, 7% Downside, Neutral)

Tata Power’s (TPWR) 2QFY19 consol. adj. PAT declined 28% YoY (+25% QoQ) to NR2.8b (our estimate: INR4.7b), driven by higher interest cost. The PAT is adjusted prior-period revenue of ~INR0.9b, net of loss on discontinued operations of ~INR0.3b. Operational performance (EBITDA and PAT of JV companies) was in line.

• Mundra EBITDA + coal JVs PAT increased 25% QoQ to INR4.1b, driven by INR depreciation, higher coal prices and savings from blending of low-GCV coal at Mundra. Indonesia’s DMO obligation impacted coal JVs PAT by ~INR0.6b. Cost of production in coal JVs is rising, which could offset gains from higher prices.
• Delhi distribution continues performing well. Regulatory assets declined by ~5% QoQ to INR41b, aiding working capital improvement in Delhi.
• RE (ex-standalone): RE EBITDA increased 8% YoY (-7% QoQ) to INR4.6b, driven by an increase in generation by 34% YoY. PAT, however, declined by 6% YoY to INR0.9b on account of higher interest cost.
• Net debt decreased by INR4.1b to INR480b in 1HFY19 as proceeds from the sale of Tata Communication (~INR20b) were utilized to finance working capital.