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Mundra-Coal JV working favorably
Debt remains elevated; Maintain Neutral
* Tata Power’s (TPWR) 3QFY20 results reflect benefits of the Mundra-Coal JV hedge, resulting in PAT improving to INR1.6b (v/s adj. loss of INR1.1b).
*While divestment-related measures could aid cash inflow and subsequent debt repayment, current valuations bake in these benefits. Maintain Neutral with TP of INR66; successful renegotiation of Mundra PPA provides an upside risk.
Profits aided by benefit of Mundra-Coal JV hedge
* Consol. adj. PAT came in at INR1.6b (v/s adj. loss of INR1.1b and below est. INR2.4b) 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 INR4.8b (v/s INR1.5b in 3QFY19), due to no impact of DMO (INR0.9b impact of previous year) and benefit of the favorable timing effect of lower coal prices.
* Delhi distribution EBITDA came in at INR0.9b (v/s INR1.2b in 3QFY19) as the previous year included an INR0.3b benefit from a tariff order.
* RE (ex-standalone) EBITDA was up 5% YoY to INR4.3b.
* Maithon EBITDA was flat YoY at ~INR2b.
Management commentary: Progress on asset monetization
* TPWR’s management has noted the sale approval of its Cennergi business by the Competition Commission, proceeds are expected in 4QFY20.
* Additionally, the defense business sale has received NCLT approval and positive discussions are ongoing for renegotiation for its ITPC PPA. It is also set to receive ~USD5m of proceeds per month from Arutmin’s sale.
* Amendment for Mundra PPA may take place in the next few months. According to the company, in a recent meeting, HPC has asked states to get approvals in place by end-Mar’20.
Mundra PPA renegotiation can provide relief
* Net debt remains elevated at INR475b on account of continuing capex and stretched receivables for renewable portfolio. Receivables for renewables stand at INR11b (v/s ~INR6b 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 INR66.
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