Tata Power: Regaining energy

The stock of Tata Power has fallen about 30 per cent over the past year. While the company reported profit at the net level both in the June and the September quarters as against loss in comparable periods last year, its net profit contracted sharply (down 87 per cent year-on-year) in the December quarter. This seems to have hurt the stock. Also, the unresolved tariff revision for the company’s loss-making 4,000 MW Mundra plant in Gujarat continues to weigh down the stock. The imported coal-based plant turned unviable after a change in Indonesian laws in 2011 raised the price of coal exports from the country.

After the price decline, at ₹57, the stock trades at 1.1 times its consolidated book value as on September 2015, lower than its five-year average valuation of 1.7 times. Investors with at least a two-year horizon can consider investing in the stock.

An expected favourable order from the Appellate Tribunal for Electricity (APTEL) allowing higher tariffs for the company’s Mundra plant should help the stock recover. The Mundra plant accounts for about half the company’s generation capacity.

That a large part of Tata Power’s operations are based on regulated returns (complete cost recovery plus an assured return on equity) as opposed to market-determined tariffs, should provide comfort to investors.

The company’s improving debt ratios are another positive. Consolidated debt-to-equity ratio eased to 2.6 times as in September 2015, from 2.8 times a year ago. More importantly, the company’s interest servicing capability too has improved. With the company pursuing restructuring of the debt taken for the Mundra plant, further easing of interest costs can be expected.

Tata Power, an integrated power company, has 40 per cent of its business running on an assured return model — 15-16 per cent return on equity. This includes its operations in Mumbai and that of its subsidiaries — Tata Power Delhi Distribution (TPDDL), Maithon Power and Powerlinks Transmission.

The company’s Mumbai operations and the larger businesses run by TPDDL (power distribution in Delhi) and Maithon Power (generation plant in Jharkhand) have been doing well. But the Mundra Plant run by the subsidiary Coastal Gujarat Power remains a pain point. While the fall in the price of imported coal has provided some relief, the plant still faces an under-recovery of 35 paise per unit of power.

Thanks to easing imported coal prices, Tata Power reversed an earlier impairment charge booked on the plant to the tune of ₹2,320 crore in the latest December quarter.

If the reported net profit of ₹2,163 crore is adjusted for this impairment charge reversal, the Mundra plant turns loss-making (₹67 crore) in the December quarter. But, this is lower than the ₹243 crore loss in the same period last year.

A decision from APTEL in favour of Tata Power can however lead to a turnaround. An earlier interim order by APTEL allowing Tata Power higher tariffs for its Mundra plant, was stayed by the Supreme Court.

APTEL was then asked to look into the matter afresh. The hearing on this has been completed and a decision from APTEL is likely sometime soon.

Impacted by the fall in revenue in the December quarter, Tata Power’s consolidated revenue for the nine months ended December 2015 grew just 2.7 per cent (year-on-year). Lower revenue from TPDDL due to a one-time accounting change in the December quarter and weakness in the Indonesian coal business affected the consolidated numbers. But thanks to sharply lower fuel costs, the company managed 17 per cent growth in operating profit to ₹5,827 crore during the April-December 2015 period. A fall in interest cost also helped push the company’s net profit to ₹513 crore in the latest nine-month period from ₹9 crore a year back.

With the outlook for thermal coal prices not very bright, relief on the fuel front should continue. On the revenue front, higher power generation from the Maithon plant should help.