Published on 4/12/2019 10:49:08 AM | Source: ICICI Securities Ltd

Option Strategy Tata Power Company Ltd By ICICI Securities

Posted in Broking Firm Views - Short Term Report| #Tata Power Company Ltd #Power Sector #Trading Report #ICICI Securities

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Tata Power Company

Tata Power’s (TPWR) adjusted consolidated profit for Q2FY20 was at Rs3.6bn, up 20.4% YoY (own share) due to good performance in almost all its businesses, especially Mundra, Maithon and Delhi Distribution. Although renewables performance was muted due to extended monsoons impacting profits, higher installed capacity partially offset the same. Loss at Mundra declined by Rs2bn (44%) YoY, resulting in loss funding of only Rs500mn by TPWR during Q2FY20. This was a positive surprise and it more than balanced the decline in profits from the coal businesses due to lower international coal prices. Profits of Delhi Distribution and Maithon were up 27% and 30% respectively. More importantly, TPWR was able to reduce its debt by Rs9.7bn during the quarter, despite Rs8bn increase in borrowings for new renewables capacity. We expect deleveraging to continue on the back of estimated asset sales of US$1bn as guided by the management. Maintain BUY, with a target price of Rs87/sh.

* Mundra improvement surprises; regulated businesses perform well: Mundra UMPP reported an EBITDA and post-tax loss of Rs1.8bn and Rs2.4bn respectively as against losses of Rs140mn and Rs4.6bn YoY. Better performance was on account of lower imported coal prices also resulting in lower fuel cost under-recovery, down from Rs0.83/unit in Q2FY19 to Rs0.51/unit in Q2FY20. Loss during the quarter declined to Rs2.6bn from Rs4.6bn YoY. Margin spread of the company’s coal mining business contracted from US$24.5/te in Q2FY19 to US$11.5/te in Q2FY20, reducing profits by 75% YoY. There was also a one-off outgo of Rs1.6bn on account of DDT and taxes related to the coal businesses, and receipt of dividend of Rs660mn (post tax) from the South African JV, adjusting for which the consolidated PAT works out Rs3.6bn. Maithon profits increased by 30% YoY to Rs520mn while PAT of the Delhi Distribution business improved by 27% to Rs1bn. Renewables business’ EBITDA/PAT growth was muted at Rs6.3bn/Rs1.5bn vs Rs6.2bn/Rs1.6bn YoY. Renewables PLF declined due to extended monsoons, which stunted both generation and demand.

* Debt decline reinforces thrust on deleveraging: TPWR has been able to reduce its debt by Rs9.67bn QoQ to Rs480bn, mainly through repayment (of Rs19.4bn). This decline was despite Rs7.4bn additional debt undertaken to fund the renewable energy projects. Net debt declined to Rs441bn while net D/E shrunk to 2.15x from 2.29x. Company expects windfall of up to US$1bn from sale of core/non-core assets in the next 12-18 months, which will further boost the debt reduction initiative. In the next 3-4 months, we expect proceeds of US$106mn from sale of South African entity Cennergi, sale of ITPC (Zambian entity; at least 1x book value {US$70mn} expected), and approval from NCLT on sale of SED (Rs9bn to be received in the first tranche). As per the management, receipt of Rs10bn out of Rs14bn outstanding from the sale of Arutmin is also expected in the next six months. Cashflow from the renewable energy businesses continues to be strong since capex is expected to be backended for the pending 500MW capacities to be commissioned by FY21-end.

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


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