Higher interest cost and FX drive miss
Proceeds from non-core asset sale driving de-leveraging; Maintain Neutral Tata Power’s (TPWR) 1QFY19 consol. adj. PAT increased 35% YoY to NR2.2b. This was below our estimate of INR4.4b, primarily due to higher interest cost and FX loss. PAT is adjusted for gain on sale of investment of INR18.9b net of tax of INR4.1b. Net debt was down ~INR12.2b on proceeds from sale of investments.
Mundra (EBITDA) and coal (PAT of JVs) combined were unchanged QoQ. Mundra’s FoB cost of coal declined QoQ on discounted cargos, even as global thermal coal prices were higher. However, PAT of coal mining companies declined QoQ as Indonesia adopted domestic market obligation (DMO) requiring sale of 25% of quantity in domestic market at lower price of USD70/t (~USD10/t lower than spot prices of coal in sea-borne market).
* RE (ex-standalone):
RE EBITDA was unchanged YoY at INR4.9b, but PAT improved on saving in interest cost. Capacity increased by 19% YoY to 1.87GW and generation by 18% YoY to 820MU. It has secured solar capacity PPAs of 400MW to be executed over the next two years.
Proceeds from non-core sale driving deleveraging; Maintain Neutral
Proceeds from non-core asset sale are gradually accruing and will drive deleveraging, saving in finance cost, and unlock some value. Indonesia’s DMO regulations will impact the hedge at Mundra and coal mines to some extent. Management believes that the regulations are temporary and the impact is for short term. The outlook for RE business is gradually improving as tendering activity picks up pace, but competitive intensity remains. TPWR’s focus is on deleveraging and consolidation. We have cut PAT by ~8% for FY19E on higher interest cost. We maintain Neutral as our SOTP value of INR75/share doesn’t offer much upside.
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