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Beat on interest reduction and Odisha profitability

Deleveraging playing out; Maintain Buy

* The improvement in TPWR’s 3QFY21 earnings was led by interest cost reduction and profitability in its Odisha distribution business. Adjusted PAT stood at INR3.7b and was significantly higher v/s our estimate of INR2.3b.

* Divestment-related measures and infusion of INR26b from the promoter has aided debt reduction. The EPC business is recovering and is expected to pick-up, led by the healthy order book at Tata Power Solar. Possible benefits from the merger of CGPL and Tata Power Solar with itself and favorable InvIT valuations provide scope for further upside. Maintain Buy with a TP of INR105 per share.

Profit improve on interest reduction and Odisha business

* Adjusted PAT at INR3.7b (3QFY20: INR1.7b) was well ahead of our expectation of INR2.4b. The beat on our estimate was led by three key factors: a) a sharp decline in interest cost, b) better coal JV- Mundra hedge, and c) profitability at CESU.

* Interest cost fell 9% QoQ to INR9.7b, given the recent debt reduction and lower borrowing costs as against our expectation of flattish sequential trajectory. CESU posted a profit of INR0.3b v/s our loss estimate of INR0.1b.

* Mundra-Coal JV hedge performed better with Mundra (EBITDA) and coal JVs (PAT) coming in at INR4.7b as against our expectation of INR4b, despite the sale of international ships.

* Reported PAT is 15% lower YoY at INR1.6b, adjusted for INR2.1b of exceptional items, but includes INR1.1b for an unfavorable MERC order.

* Net debt reduced to INR395b (v/s INR471b as of FY20-end), led by divestment-related measures and infusion of INR26b from the promoter.

Highlights from the management commentary

* CESU earned a profit of INR0.3b, with 24-25%/33.9% 3Q/FY21 YTD AT&C. TPWR’s management expects CESU’s performance to be better than the decided trajectory.

* The company is close to finalizing its InvIT and hopes to announce it soon. It would look to transfer 3.4GW of projects to the InvIT, of which 2.7GW are currently operational.

* TPWR expects its solar EPC order book to be completed over the next 1-2 years.

Debt reduction playing out; see a favorable risk-reward at current levels

* We raise our FY21E/FY22E estimate by 15%/6%, taking into account higher profitability for its EPC business and Odisha DISCOMs.

* Net debt reduced to INR395b (from INR471b in FY20). Debt reduction should lead to lower interest costs. With a pick-up in its EPC business, we expect EPS to rise by 24% CAGR over FY20-23E. We maintain a Buy on TPWR and raise our TP to INR105, taking into account: a) the recent takeover of Odisha DISCOMs, b) higher EPC profitability, c) benefits from the merger of CGPL and Tata Power Solar with itself, and d) higher valuations for the renewable business (8x EV/EBITDA v/s 7.5x earlier).

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