Analyst Corner: Maintain ‘neutral’ on Tata Power; TP at Rs 66

Tata Power’s (TPWR) Q3FY20 results reflect benefits of the Mundra-Coal JV hedge, resulting in PAT improving to Rs 1.6 bn (v/s adj. loss of Rs 1.1 bn). While divestment-related measures could aid cash inflow and subsequent debt repayment, current valuations bake in these benefits. Maintain ‘Neutral’ with TP of Rs66; successful renegotiation of Mundra PPA provides an upside risk.

Consol. adj. PAT came in at Rs1.6 bn (v/s adj. loss of Rs1.1 bn and below est. Rs2.4 bn) on better working of the Mundra-Coal JV hedge. This was led by higher-than-expected interest costs and slightly lower-than-expected performance at standalone and Delhi distribution. Mundra (Ebitda) and coal JVs (PAT) rose to Rs4.8 bn (v/s Rs1.5 bn in Q3FY19), due to no impact of DMO (Rs0.9-bn impact of previous year) and benefit of the favourable timing effect of lower coal prices. Delhi distribution Ebitda came in at Rs0.9bn (v/s Rs1.2 bn in Q3FY19) as the previous year included a Rs0.3-bn benefit from a tariff order. RE (ex-standalone) Ebitda was up 5% y-o-y to Rs4.3 bn. Maithon Ebitda was flat y-o-y at Rs2 bn.

TPWR’s management has noted the sale approval of its Cennergi business by the Competition Commission of India, proceeds are expected in Q4FY20. Additionally, the defense business sale has got NCLT’s approval and positive discussions are ongoing for renegotiation for its ITPC PPA. It is also set to receive $5 m of proceeds per month from Arutmin’s sale. Amendment for Mundra PPA may take place in the next few months. According to the firm, in a recent meeting, HPC has asked states to get nod in place by end-March 2020. Net debt remains elevated at Rs475bn on account of continuing capex and stretched receivables for renewable portfolio. Receivables for renewables stand at Rs11 bn (v/s Rs6 bn in FY19).

Besides, upcoming new regulations for Indonesian coal mines (concerning tax and royalty) could be an overhang. The amendment of Mundra PPA, on the other hand, still awaits state approval; we have not built in any benefit from this. Successful renegotiation of this PPA — based on HPC recommendations — would provide an upside to our estimates. Maintain Neutral with SOTP-based target price of Rs66.

Source: Financial Express