Edelweiss reports healthy renewable business and abundant triggers in store for the stock to re-rate
Tata Power (TPWR) is India’s largest integrated power company with a growing international presence. The company together with its subsidiaries and jointly controlled entities has an installed gross generation capacity of 10466 MW and a presence in all the segments of the power sector viz. fuel security and logistics, generation (thermal, hydro, solar and wind), transmission, distribution and trading.
Tata Power is serving more than 2.6 million distribution consumers in India and has developed the country’s first 4000 MW Ultra Mega Power Project (UMPP) at Mundra in Gujarat based on super-critical technology and due to its lowest levelised tariff bid at Rs 2.26 per unit. It is also one of the largest renewable energy players in India with a clean energy portfolio of 3144 MW.
Its international presence includes strategic investments in Indonesia, Singapore, Bhutan, South Africa, sub-Saharan Africa, Zambia, Georgia, and Norway.
Tata Power is a pioneer in India's power sector and plays a pivotal role in the sector. In the past, the company has exhibited expertise in project execution. At the end of the previous financial year, 2017, the company had an installed capacity of more than 10 gigawatt (GW). TPWR has 30 per cent stake in two coal mines of Bumi Resources with proven reserves of 1.9bn tonnes. With rising coal prices, the power player will have significant profits from these assets.
Superior show by associates and renewable business
For the first quarter of 2018, Tata Power posted improved operational performance on account of better performance in renewable business. Tata Power Renewable (TPR) jumped five times year over year (YoY) in profit after tax (PAT) at Rs 58 crore and renewable portfolio of the company. The contribution of Tata Power, on standalone basis, TPR, and Walwan has sustained turnaround in renewable business with substantial contribution of Rs 110 crore to consolidated PAT. Moreover, in case of renewable business receivables, position is quite healthy presently. This sustained performance of renewable business also can be a trigger for the stock to re-rate.
The associate companies have extended their strong performance and contributed Rs 380 crore to consolidated PAT, with coal infrastructure companies and Itezhi Tezhi Power Corporation Limited (ITPC) lead contributing Rs 93 crore and Rs 55 crore to PAT, respectively.
Mundra reports higher losses; containing coal cost key
For the quarter ended in June’17, Coastal Gujarat Power Ltd (CGPL) reported loss of Rs 430 crore, which was higher than the last year on account of higher imported coal prices. The coal prices have hiked by more than 35 per cent YoY. Yet, the coal companies have done well on higher coal prices.
Owing to the scheduled maintenance activity, plant availability was lower at 61 per cent. Though at consolidated level, incremental losses in CGPL was largely offset by gains in coal and logistics businesses. Management highlighted that competitive sourcing of coal from various locations as compared to only Indonesia earlier has already commenced and will be ramped up in the coming quarters.
There were no one-off items as such, however in CGPL, since annual costs are paid on availability basis and during the first quarter, availability is generally low so fixed cost recovered was less.
During the quarter, under-recovery in CGPL increased to Rs 0.93 per unit as against Rs 0.30 per unit in the previous sequential year. The under-recovery increased given 35 per cent plus surge in imported coal price to USD59 per tonne. Although CGPL losses are already factored in, the stock can be re-rated given TPWR’s ability to contain coal cost to mitigate the under-recovery and its diversifying coal sourcing.
International spectrum
The pure-power giant player has turned in good performance in both Zambia and Dagachu hydro projects. In Zambia, Tata Power has a joint venture with ZESCO, a Zambian power utility, on equal sharing basis on a 25 year BOOT (Build-Own-Operate-Transfer) concession term for 120 MW Hydro which became operational in 2016.
The 126 MW Dagachhu hydro power project in Bhutan is a joint-venture initiative between Tata Power and Druk Green Power Corporation, which is owned by Royal Government of Bhutan (RGoB) and National Pension & Provident Fund of Bhutan. The project was commissioned in 2014.
Tata Power through Adjaristsqali Georgia LLC (AGL), its joint venture with Norway's Clean Energy Invest AS Norway (Clean Energy) and IFC InfraVentures (IFC), a member of the World Bank group, has completed the construction of its 187MW Shuakhevi Hydro Power Project (HPP) in Georgia. The company commissioned assets at Georgia.
The PPAs
The hearings are going on for power purchase agreement (PPA) at Mumbai generation and the decision for renewal decision will happen post the hearings.
The solar PPAs get renegotiated and the negotiation was only for those agreements where some negotiation is pending, for example Letter of Assurance (LoA) is missing. This means that existing working PPAs will not be impacted.
Going ahead
The key growth driver for Tata Power is the renewable business. The target is to take renewable’s proportion to 30 to 40 per cent of total generation portfolio. At the current market price of Rs 82, TPWR is trading at 1.6 times the expected earnings of 2018.
In addition to this, Tata Power successfully executed its divestment plans which could prune debt. It decreased its current debt-to-equity ratio from three times to two times. The efforts to decrease debt will be a key trigger for the stock.
Key risks
TPWR fully commissioned two key projects at 4,000 MW Mundra and 1,050 MW Maithon. The dynamics of Indian electricity market have undergone a sea change due to higher imported coal prices, weak customer finances, changing fiscal norms at coal exporting countries and now, a depreciating rupee. Hence, balancing between contractual supplies, both in volume and price and maximising earnings have become a key determinant and risk.
The company had restated the stripping costs by 15 per cent to 11.5 in 2010 which should have lead to upward restatement of reserves from 2.1bn tonnes. However, recently the restatement was only to the extent of 20mn tonnes. Unless another round of restatement is done or costs are brought down, the value of coal mines could be suppressed.