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Upgrade to Buy on attractive valuation
* Q3FY20 net generation declined 10.5% yoy to 4.6bn units, primarily due to subdued nationwide demand on a slowdown in economic activity. Average realization too declined 9.8% yoy to Rs4.3/unit and revenues declined 19.5% yoy to Rs19.5bn.
* EBITDA declined 13.6% yoy to Rs6.4bn. The decline in generation led to a 22.9% yoy fall in fuel prices and a 19.9% yoy fall in other expenses. Interest expenses declined 11.4% yoy. APAT, however, rose 118.5% yoy to Rs3.5bn due to a write-back of tax expenses.
* Management targets to sign Share Purchase Agreement (SPA) for the acquisition of 1,050MW GMR Kamalanga Energy project in two weeks. For 700MW Ind-Bharat Energy, approval by the NCLT is under process for the resolution plan submitted by the company.
* We will consolidate the financials of these projects after the SPA and NCLT approvals. We have revised our earnings estimates to factor in low PLF at Vijaynagar plant. The stock price has corrected recently and is attractively valued at CMP. Hence, we upgrade it to a Buy.
Generation continues to fall amid subdued demand: Consolidated net generation declined 10.5% yoy to 4.6bn units in Q3FY20. Net generation at its Ratnagiri and Vijaynagar plants fell 11.0% yoy and 20.0% yoy to 1.75bn units and 802mn units, respectively, due to lower demand and a fall in merchant rates. Generation also declined at its Barmer plant by 12.8% yoy to 1.3bn units due to low offtake by discom. Generation, however, increased 6.0% yoy to 730mn unit across the hydro plants due to improved water availability.
Accordingly, in Q3FY20, the Plant Load Factor (PLF) improved across the hydro projects (25.6% vs. 24.2% yoy), while it declined in Barmer (59.3% vs. 68.1% yoy), Vijaynagar (45.9% vs. 57.0% yoy) and Ratnagiri plants (72.3% vs 80.9% yoy). Blended realization declined 9.8% yoy to Rs4.3/unit. Consequently, revenue declined 19.5% yoy to Rs19.5bn; fuel costs and other expenses declined 22.9% yoy and 19.9% yoy, respectively. EBITDA declined 13.6% yoy to Rs6.4bn. Interest expenses were down 11.4% yoy to Rs2.6bn as a result of debt repayments. Adjusted PAT, however, increased 118.5% yoy to Rs3.4bn (above our estimate) due to a write-back of tax expenses on the re-assessment of deferred tax liability.
Upgrade to Buy on attractive valuations: The proposed acquisitions of the two thermal assets are under way and management targets to sign SPA for the GMR Kamalanga project in a couple of weeks. Our initial assessment indicates that both projects can offer higher RoE (Kamalanga at 16% and Ind-Bharat 34%) without putting much stress on D/E (at 1.2x). We have adjusted FY20/21 estimates to factor in Q3FY20 tax implications and low PLF at Vijaynagar plant. The stock price has corrected recently and is attractively valued at CMP; hence, we upgrade it to Buy while marginally lowering our SoTP-based TP at Rs73. Maintain OW stance in EAP. Key risks would be rise in international coal prices and low merchant rates.
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