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Lower under-recoveries drive strong performance
* Capitalization to pick up pace; under-recoveries to decline
Standalone (S/A) adj. PAT (management stated) grew by a healthy 14% YoY to ~INR106b in FY19 even as regulated equity grew by ~6% YoY (to ~INR540b). The strong performance was led by sharp reduction in under-recoveries on fixed charge (from ~INR14b in FY18 to ~INR8b in FY19) and increase in late payment surcharge income. Reported PAT was higher at INR117.4b (13% YoY) in FY19 on tax related adjustments (~INR17b), offset partly by certain one-time expenses.
* Consolidated reported PAT grew 20% YoY to INR126.4b in FY19. Besides the healthy performance in S/A, improving performance in subsidiaries/JVs (PAT improving from INR2b in FY18 to INR8.9b in FY19) aided such a strong growth.
* For 4QFY19, S/A adj. PAT (management stated) grew ~48% YoY to INR34.2b. The growth was led by lower under-recoveries on fixed charges (from a drag of ~INR5b in previous year quarter to an over-recovery of ~INR3b in 4QFY19) and increase in late payment surcharge income. Excluding the late payment surcharge the PAT was lower than expected, probably due to some full year related billing adjustments. Reported PAT was higher at INR43.5b (49% YoY) in 4QFY19 on tax related adjustments (~INR17b), offset partly by certain one-time expenses. Capitalization target is ~5GW for FY20 (vs. 1.7GW achieved in FY19).
* Capitalization to pick up pace; under-recoveries to decline; Re-iterate Buy
Operations are turning around as availability of coal improves and FC u/r decline. Management expects no fuel-related under-recoveries from FY20 (v/s INR8b in FY19), which will likely boost PAT. Under-recoveries on GCV and O&M are well addressed in the tariff regulations 2020-24, which will also support earnings. We expect capitalization to pick up pace, driving a regulated equity CAGR of 14% over FY19-21. Capitalization will outpace capex, boosting RoE and driving re-rating of the stock. We are not building in the benefit of the shift to accrual accounting of late payment surcharge, which can boost PAT by ~INR3-4b. Re-iterate Buy with a DCF-based target price of INR158/share.
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