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Strong growth sustains in Q4

Summary

* Q4FY22 consolidated adjusted PAT grew by 66% y-o-y to Rs. 653 crore (4% above our estimate) supported by higher standalone profits (rise in dividend income and tax benefit on CGPL merger) and good performance by renewable energy generation business offsetting lower coal profit and weak solar EPC margin. Š Coal mining business disappointed as PAT declined by 36% q-o-q to Rs. 397 crore as January sales was restricted to domestic Indonesian customer at capped price of $70/tonne and lower sales volume (down 21% q-o-q) because mine operation got impacted due to heavy rains in March. Š Mundra UMPP reported loss of Rs. 484 crore due to lower PLF of 25% and rise in fuel under-recoveries to Rs. 1/unit (versus only Rs. 0.16/unit in Q3FY22). However, management indicated that it is in advanced discussion with Gujarat and is in talks with other states for supplementary PPAs for fuel coal cost pass through. This would reduce fuel under-recoveries and lower losses at Mundra. Š We maintain Buy on Tata Power with an unchanged PT of Rs. 315. At CMP, the stock trades at 3.2x/2.9x FY23E/FY24E P/BV.

Tata Power Company Limited’s (TPCL’s) Q4FY22 adjusted PAT of Rs. 653 crore (up 66.3% y-o-y) was 4% above our estimate of Rs. 632 crore primarily on the account of higher dividend income and tax benefit from CGPL merger in standalone business (PAT at Rs. 1770 crore versus net loss of Rs. 159 crore in Q4FY21) and good performance from RE business (PAT grew by 64% y-o-y to Rs. 280 crore) led by higher profits (up 2x y-o-y to Rs. 286 crore) from RE generation portfolio partially offset by decline in solar EPC margin to only 2.1% in Q4FY22 versus 6.2% in Q4FY22 due to higher module cost. Coal mining business performance was disappointing with 36% q-o-q decline in PAT at Rs. 397 crore owing to lower volumes of 10.4 mt (down 21% q-o-q) and lower gross margin at $28.3/tonne as in January sales was restricted to domestic customers at capped price of $70/tonne and March volumes were impacted by heavy rainfalls. Mundra reported net loss of Rs. 484 crore (versus net loss of Rs. 277 crore in Q4FY21 and Rs. 458 crore in Q3FY22) due to high fuel under-recoveries at Rs. 1/unit (versus Rs. 0.72/Rs. 0.6 per unit in Q4FY21/ Q3FY22) and lower PLF of 25% (versus 74%/31% in Q4FY21/Q3FY22). All four Odisha discoms (North, West, Central and South) remained profitable with combined with aggregate PAT of Rs. 109 crore versus only Rs. 42 crore in Q4FY21.

Key positives

* RE power generation (TPREL + WREL) profit grew strongly by 2.1x y-o-y to Rs. 286 crore.

* CGPL merger completed and reflected in tax benefit in standalone business.

Key negatives

* Higher fuel under-recoveries of Rs. 1/unit at Mundra versus only Rs. 0.16/unit in Q3FY22.

* Sequential steep decline of 36% in coal profits due to lower volume and margins.

* Tata Power Solar System reported sharp margin contraction of 410/751 bps y-o-y/q-o-q to 2.1% due to higher module cost.

Management Commentary

* Tata Power is in advanced discussions with GUVNL and in talks with other states to implement supplementary PPAs for full coal cost pass through w.e.f January 1, 2022. SPPAs are expected to continue until coal prices normalize to pre-COVID levels.

* The company has secured extension of Indonesian coal mining license for 10 years with revised royalty and taxation norms, which would have largely neutral impact on profits from coal business.

* Strong solar EPC order execution of ~555MW in Q4FY22. Management expects solar EPC margin to improve going forward as it looking at contract manufacturing in India and new projects factors in revised pricing term for solar modules.

* Consolidated net debt at Rs. 39,708 crore is largely flat sequentially. Revision in estimates – We have fined-tuned our FY23-24 earnings estimate to factor FY22 P&L and balance sheet numbers.

Our Call Valuation –

We maintain Buy rating on TPCL with an unchanged PT of Rs. 315: TPCL’s focus on business restructuring (CGPL merger) and focus on high growth RE business and entry in to power transmission would play a crucial role for sustained earnings growth and improved earnings quality (expect RoE to improve to 12% in FY24E versus only 7.8% in FY22). Additionally, management’s business restructuring plans to increase share of high growth RE business would drive sustained improvement in ESG scores. Moreover, a potential agreement with states for full pass-through of fuel cost would improve earnings growth outlook and support balance sheet deleveraging plan. Hence, we maintain a Buy on Tata Power with an unchanged PT of Rs.315. At CMP, the stock is trading at 3.2x/2.9x FY23E/FY24E P/BV. Key Risks 1) Slower-than-expected ramp-up of RE portfolio and expansion in distribution business, 2) Lower-thanexpected profitability in Solar EPC business, and 3) volatility in international coal prices

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