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Long-term private power play

Tata Power (TPWR) reported decent performance in Q4FY22 with high revenue growth being offset by decline in margins due to commodity price pressures and one-time items. On consolidated basis, TPWR’s reported revenues for the quarter were up 17% YoY at Rs120.5bn mainly due to higher revenues from Odisha discoms and strong TPSSL execution. Reported PAT was Rs6.3bn (up 31% YoY). However, adjusted PAT (TPWR’s share), after adjusting for one-time items, was Rs6.5bn (up 64% YoY). There were several positives during the quarter, viz. 1) merger of CGPL into TPWR leading to tax savings, 2) renewal of KPC license for 10 years, 3) strong order execution by TPSSL, 4) acquisition of two transmission projects by Resurgent Power with Rs9bn of annual revenues, and 5) continued strong performance of Odisha discoms. We believe most of the issues that impacted Q4FY22 performance are behind us (mainly Tata Projects and TP Solar EPC margins). Production at coal mines is back to normal levels of >14mnte p.m. from May’22, while margins for both TPSSL and Tata Projects are expected to improve with new higher-margin orders, contract manufacturing arrangements and moderation in commodity prices. Further, Mundra SPPA signing, RE tendering and ordering pick-up are key near-term drivers. Upgrade to ADD (from Hold).

Revenue growth offset by one-offs and increase in commodity prices: For Q4FY22, TPWR’s reported revenues (on consolidated basis) were up 17% YoY at Rs120.5bn mainly due to higher revenues from Odisha discoms and strong TPSSL execution. Reported PAT was Rs6.3bn. However, after adjusting for CGPL tax reversal (Rs4.8bn) and impairment provisions for SED receivables and Georgia Hydro (Rs6.2bn), adjusted PAT was Rs7.75bn (100%). Underlying EBITDA was at Rs25.5bn (vs Rs20.2bn YoY), up 26% YoY. GreenCo EBITDA increased 51% YoY to Rs9.6bn. For FY22, on consolidated basis, reported revenues were Rs424bn (vs Rs330bn), up 29% YoY, and reported PAT (TPWR's share) was Rs17.4bn (vs Rs11.3bn), up 54%.

CGPL and Af-Taab merged into Tata Power; supplementary PPA expected to be signed soon: Merger of CGPL and Af-Taab into TPWR is complete and effective from 1 st Apr’20. The merger provides several administrative and financial synergies. Carried-forward depreciation and business losses are to the tune of Rs127bn and Rs38.2bn respectively. Mundra booked high under-recoveries (Rs1/unit) during Q4FY22 as revised fuel cost was only partially passed on. Supplementary PPA with Gujarat is under discussion and is expected to be signed in the next 2-3 weeks. This will become a template for signing of similar SPPAs with other states, and will be effective from 1st Jan’22. Mundra has been supplying 1,805MW to Gujarat and 760MW to Maharashtra, with four units currently operational. Gujarat has requested continuation of power supply under the draft SPPA. Favourable outcome of discussion on SPPA with Gujarat for CGPL is likely to help reduce under-recoveries by 20-30%

KPC license renewed for 10 years; production to normalise from May’22: KPC mining license has been extended by 10 years (with further extension possible as per extant regulations). Coal mine operations were affected due to heavy rains and local issues, resulting in reduced production during Q4FY22. Further, export restrictions resulted in only local sales at the capped US$70/te DMO price, leading to reduction in profit. However, production is back to its normal run-rate of >14mnte p.m. from May’22 onwards and HBA price to be applicable for sales volumes beyond DMO will aid profits in the subsequent quarters. Corporate tax has been reduced from 45% to 22%. However, royalty increase roughly offsets the corporate tax cuts. Royalty rates are graded on the quality and price of coal, hence rates for DMO have also increased.

Deal secured for equity infusion in the RE businesses; to be closed in next two months: TPWR will be raising Rs40bn (~US$525mn) by offloading 10.53% stake in its renewables arm – TPREL – to GreenForest New Energies Bidco Limited (UK), a consortium led by BlackRock Real Assets with Mubadala Investment Company at a pre-money equity valuation of Rs340bn. Investment will be in two tranches. First tranche of Rs20bn will be received by Jun’22 (closing date of transaction) and the second tranche of Rs20bn by Q1FY24. Fresh equity infusion into TPREL is expected to make it more competitive in auctions and grow its RE portfolio as per targets (click here for more details on the deal in our earlier report).

EPC businesses’ margins to improve going forward: While the quarter saw strong execution by TPSSL’s utility scale, solar rooftop and solar pumps businesses to take the revenues for Q4FY22/FY22 to Rs34.8bn/Rs85.1bn, margins were dented due to high commodity and solar module prices (PAT was Rs280mn in Q4FY22 and Rs1.6bn in FY22). However, for TPSSL, most legacy orders have been executed and new orders incorporate higher module and commodity prices, which we believe will help margin improvement going forward. Further, domestic contract manufacturing arrangements will help reduce volatility. Commodity price pressures also dented margins of Tata Projects during the quarter, but this is expected to ease going forward. TPSSL secured LoA for 1GW solar EPC project worth >Rs50bn from SJVN under CPSU scheme in May’22, which is the largest single project awarded to it till date.

Valuations and outlook: We upgrade TPWR to ADD (from Hold) due to the decline in the stock price, but maintain our target price of Rs262. The stock is currently trading at FY24E P/E of 26.6x and P/B of 2.9x. We believe the long-term potential of the company's businesses is good, especially its renewables and distribution businesses. We also believe TPWR is the best-placed private player in the power sector, with businesses across the value chain and backward integration. Mundra SPPA signing, easing of commodity prices and RE tendering and ordering pick-up are the key near-term drivers. Interest costs can further decline on account of CGPL merger in the standalone entity.

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