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Strong quarter; robust growth visibility ahead

Tata Power Company (TPWR) reported strong performance in Q1FY23 with high revenue and profit growth. On consolidated basis, the company’s reported revenue for the quarter, at Rs147.5bn, was up 51% YoY mainly due to higher power sales across discoms and higher PAF and PLF for Mundra. Reported PAT (TPWR's share) was up 103% YoY at Rs7.9bn, boosted by higher profits in the coal business, and despite losses booked for Tata Projects and TPSSL, as well as the negative impact of conservative accounting for CGPL. As per the company, the first tranche of Rs20bn from TPREL stake sale is expected in the next few weeks, which will immediately provide growth capital to the company, making it more competitive in auctions. For CGPL, tariff determination by CERC as per section-11 of the Electricity Act will aid reduction in under-recoveries. Further, supplementary PPA, if signed with Gujarat, will be a major positive. Since provisioning and write-offs are now complete for both Tata Projects and TPSSL, we believe they should turn-around from Q2FY23 onward. Easing of commodity prices and domestic contract manufacturing arrangements in case of TPSSL will also help. Maintain BUY.

* Strong revenue and profit growth: For Q1FY23, TPWR’s reported revenues (consolidated) were up 51% YoY at Rs147.5bn mainly due to higher power sales across discoms and higher PAF & PLF for Mundra. Reported PAT (TPWR's share) was Rs7.9bn, up 103% YoY, boosted by higher profits in coal business, and despite losses at Tata Projects and TPSSL during the quarter. Underlying EBITDA was Rs29.1bn, up 6.6% YoY. GreenCo EBITDA increased 21% YoY to Rs7.8bn. The strong performance was driven mainly by: 1) good performance of all discoms due to higher power demand (Odisha discoms posted profits again), 2) CGPL + coal companies’ profits of Rs5.1bn despite negative impacts due to provisions in CGPL pending CERC approval for interim tariff, 3) strong growth in RE businesses, including solar rooftops and pumps. Company’s net debt at Q1FY23-end was stable at Rs423bn despite capex of >Rs20bn during the quarter. Acquisition of two transmission projects by Resurgent Power with combined EV of Rs65bn and annual revenue of Rs9bn (when commissioned) is now complete. We expect TPWR’s receivables to decline going forward as it is transient.

* CGPL and coal companies’ performance was robust: CGPL and coal companies posted profits of Rs5.1bn during the quarter, despite negative impact of Rs3bn due to conservative accounting and forex MTM losses and Rs1.5bn due to under-recoveries. CGPL booked under-recoveries during Q1FY23 mainly on sales during Apr’22 since section-11 of the Electricity Act was invoked by the government of India only from 5th May’22 onward. This notification on section-11, which is valid up to 31st Oct’22, provides for full compensation of cost of power generation by the buyer along with a certain profit, to be determined by the regulator (CERC). Thus, the arrangement includes full coal cost pass-through. The MoP has given an interim tariff based on which CGPL has been billing the offtakers. However, the company has filed a petition for tariff finalisation with CERC, and expects it to be cost-reflective, as per the provisions of section-11. The validity of this notification on section-11 can be extended further, which the company is confident of, since power demand continues to be robust. Currently, three units of Mundra areoperational and supplying power to Gujarat and Maharashtra. However, all units are earning fixed costs. We believe once CERC approves the tariff, the Rs3bn impact may be reversed in the coming quarters.

* Tata Projects and TPSSL margins expected to improve going forward: Both Tata Projects and TPSSL posted losses during the quarter, as the company had to make provisions and write-offs mainly due to the increase in commodity prices. This is expected to take care of all the provisioning required for this business and we expect margins to improve going forward. For TPSSL, additionally, there was a hit due to currency depreciation as the company had not fully hedged its currency exposure on module imports (now 100% hedged on back-to-back basis). We believe, for TPSSL most legacy orders have been executed and new orders incorporate higher module and commodity prices, which will help improve margins going forward. Further, domestic contract manufacturing arrangements will help reduce both price and supply volatility. Also, easing of commodity prices in the past few weeks is positive for both TPSSL and Tata Projects.

* Receipt of first tranche of Rs20bn through equity infusion in TPREL will bolster RE competitiveness: TPWR is 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 in the next few weeks as the transaction has received approval from the CCI. Fresh equity infusion into TPREL will make it more competitive in auctions and grow its RE portfolio as per targets. Tata Power will also benefit from the current RE dynamics, particularly since the implementation of BCD on imported cells and modules effective from Apr’22 has made Chinese imports dearer and forced dependence on domestic sourcing of modules, creating a level playing field for all bidders, and also ensuring contractual stability.

* Valuations and outlook: We maintain our BUY rating and SoTP-based target price of Rs262 on TPWR. The stock is currently trading at FY24E P/E of 24.5x and P/B of 2.7x. 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.

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