Q2 comment. Tata Power quarterly results: What investors must know

Tata Power announced results for the September quarter on Friday. The company reported a 43 per cent year-on-year (y-o-y) growth in revenue from operations at ₹14,030 crore, beating Bloomberg consensus estimates by around 7 per cent with a margin of around 14 per cent.

The company’s EBITDA grew 18 per cent to ₹ 2,043 crore. Profit after tax (PAT) saw an increase of around 85 per cent at ₹935 crore, beating Bloomberg consensus estimates by around 8 per cent.

Performance

Tata Power is in the business of thermal power generation, transmission and distribution (T&D), and renewables.

In Q2 FY23, power generation business contributed about 35 per cent, while T&D, which includes power trading business, and renewables contributed about 55 per cent and 10 per cent, respectively.

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The increase in consolidated revenue and EBITDA has been contributed by growth in generation segment (118 per cent) and T&D (37 per cent).

The growth in revenue from generation was on account of availability of imported coal at 4,000 MW Mundra plant which has reported a PAF (plant availability factor) of 92 per cent for Q2 FY23, up from 28 per cent in Q2 FY22.

In May, the government invoked Section 11 of the Electricity Act, 2003 to ensure the functioning of all imported-coal-based power plants, many of which were shut down earlier as they weren’t allowed to pass on increase in international coal prices.

Accordingly, the power ministry decided to work on the rate at which higher cost of imported coal can be passed on to the PPA holder. Though this arrangement has been extended till December 31, 2022, the company is uncertain whether it will be extended further or not.

Such arrangements will have a considerable impact only when long-term supplementary power purchase agreements (PPAs) are signed with States.

The growth in company’s revenue from T&D business was driven by improved billing and collection efficiency in the Odisha distribution entity. Relatively, the company’s T&D segment has been a lower margin business.

The company’s renewables segment mainly comprises of power generation from solar and wind, rooftop solar projects, electric vehicle charging stations and solar EPC and maintenance services. In this segment, the company reported a single digit (around seven per cent) increase in revenue coupled with margins contraction of around 300 bps on a y-o-y basis led by delays in project execution and rising module prices.

The company’s D/E (debt-to-equity) as on September 30, 2022 stands at 1.81 times. It has seen a gradual reduction in the last few years from around 2.6 times in 2018.

Valuation and Outlook

Currently, the company trades at a trailing P/E of 32 times (versus 5-year average of 15.4 times) and around 21 times the estimated FY23 earnings. Trailing EV/EBITDA for the firm is around 17 times. The firm’s higher valuation can be attributed to its renewable ventures and orderbook.

As on September 30, 2022, the company has an orderbook worth ₹15,000 crore in the solar utility scale EPC space wherein the company undertakes third-party projects for companies such as NTPC, SJVN and NHPC.  

The company has plans to set up around 60 EV charging points across JP Infra’s residential projects in Mumbai and around 450 charging points across national highways and has an orderbook of worth around ₹ 1,500 crore in solar rooftop and solar pump projects. It is also building a 4 GW manufacturing facility which management expects to get completed by next year.

Post results announcement, the stock of Tata Power (CMP: 225) was trading flat on Monday, which might be on account of uncertainty on sustainability of high tariffs from Mundra plant and valuation already accounting for the company’s future prospects.