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Published on 9/10/2019 9:03:41 AM | Source: ICICI Securities Ltd

Option Strategy Tata Power Company Ltd by ICICI Securities

Debt reduction underway

Tata Power (TPWR), through its wholly-owned subsidiary Khopoli Investments Ltd, announced divestment of its entire 50% stake in Cennergi (Pty) Ltd, a South African JV. The proposed buyer is Exxaro (the current JV partner), a leading South African coal producer, which will become the 100% owner of Cennergi. The consideration amount for the proposed sale is US$106mn (~Rs7.4bn) and is expected to be completed by Q3FY20. We expect this transaction, along with other anticipated divestments, to aid in partial repayment of TPWR’s non-core debt resulting in an earnings CAGR of 29% over FY20E-FY21E with an underlying EBITDA of ~Rs99bn growing at 5% CAGR. We maintain our BUY rating on TPWR with a target price of Rs87/share; the stock is trading at 0.9x FY21E P/BV.

* Reduction of non-core debt continues to be a key focus area: TPWR’s total debt stands at Rs489bn, of which Rs115bn is non-core (relating to CGPL loss funding and Welspun acquisition premium). However, it has plans for asset sales and liquidation of regulatory assets to the tune of Rs125bn (excluding Tata Projects) over the next 2- 3 years. This divestment will be a step in that direction. We also expect the Zambian subsidiary’s divestment to be closed in FY20 itself at an attractive valuation given that it is also a profitable business.

* About Cennergi: Cennergi owns two wind farms in South Africa – Amakhala Emoyeni (with a generation capacity of 134.4MW and 95% shareholding) and Tsitsikamma Community Wind Farm (generation capacity: 95.3MW, shareholding: 75%). Each of them have 20-year PPA with the state power utility Eskom. TPWR currently has 50% holding in Cennergi and has invested Rs3.9bn in it till date. Thus, the sale will be at 1.9x its investment. In FY19, Amakhala and Tsitsikamma wind farms operated with plant availability of 98.03% and 98.22% respectively. Cennergi’s PAT in FY19 improved on the back of higher tariffs as per the PPAs, lower interest cost due to refinancing and impact of hedge accounting in FY18.

* 150MW solar plant also commissioned: Tata Power Renewable Energy (TPREL) commissioned a 150MW solar capacity in Rajasthan, taking its overall operating renewable capacity in India to 2,628MW. The plant has a 25-year PPA at a tariff of Rs2.72/kWh with MSEDCL and is TPWR’s first ISTS solar plant.

* Maintain BUY: We maintain our BUY rating on TPWR with an SoTP-based target price of Rs87/share. Reduction in Mundra under-recoveries and further sales of noncore assets could trigger further upside.

Key downside risks:

i) continued pressure from DMO in Indonesia, and

ii) increase in Mundra under-recoveries.

 

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