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Mixed bag; outlook upbeat

The Q2 results of Tata Power (TPCL) manifest strong traction towards clean energy businesses and a head start with leadership status across. Q2 adjusted PAT beat estimate by 10% driven by higher integrated profits from Mundra/coal mining business. In our view, value unlocking through RE monetisation, exit from coal mining business and Mundra resolution are the key catalysts in the near to medium term.

Our revised valuation framework assigns higher value to the new clean energy businesses (INR125 versus INR70 earlier) taking cognisance of the growth platform premium, recent deals at higher valuations and higher coal profits, apart from the valuation rollover to FY23. Maintain BUY with a revised TP of INR245 (earlier-INR175).

High Mundra losses to subside; other businesses on track

TPCL’s adjusted PAT (INR2bn translation gains and one-time tariff reversal) beat our PAT forecast by 10%. Key highlights: i) Mundra losses came in at INR8.5bn, impacted by INR2.2bn reversal of fix tariff and INR1.7bn contractual obligations for lower PAF. ii) Management expects fuel cost pass-through arrangement with states to continue in the near term (possibly till FY22) due to high power demand – cash losses could reduce to INR2.5bn per quarter.

iii) Sequential decline in EPC revenue due to supply chain issues with margins at sub-5% due to higher module prices-expected to improve in new orders. iv) EV charging infra business is on track with 100 chargers installed at a gross block of INR0.5bn, which includes slow chargers installed earlier. We have lowered TPSL PAT margins assumptions by 100bps due to high module prices and working capital requirements. Further, we await clarity on the new Indonesian mining regulation, which could impact PAT due to high royalty.

Stable balance sheet; CGPL merger in final stages

In Q2, TPCL pre-paid its INR35bn high cost borrowings and overall net debt stayed at INR390bn despite INR15bn-plus in capex. With the NCLT approval in place, CGPL merger with SA is likely in Q4 pending the postal ballot.

Management is confident of project wins in the transmission space on the back of a tie-up with Tata Projects. Explore:

Outlook and valuation:

Triggers in place; maintain ‘BUY’ TPCL seems to be making right moves in business transition, and there could be a period of interim volatility that needs to be ridden along. Our valuation framework leaves little room for further TP upside potential. We recommend a buy-on-dips strategy. Maintain ‘BUY’ as a top sectoral pick.

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