Tata Power Rating ‘Overweight’; operationally a strong second quarter

TPWR reported revenue and Ebitda growth of 15% and 11% y-o-y, respectively. TPWR’s revenue, Ebitda and adjusted PAT were 13%, 17% and 5%, respectively vs. our estimates and 12%, 10% and -6% vs. consensus. PBT was 160% above our forecast driven by Ebitda beat and higher other income; however, effective tax rate was high leading to marginal beat at the adjusted PAT level.

Corporate updates
(i) Preferential issue of new equity shares to promoters was concluded at Rs 26 bn;
(ii) the plan of Renewable Invit is progressing well as a non-binding agreement has been signed and due diligence by investors is underway. Management is hopeful of closing the deal in the next two to three months; (iii) sale of Defence business was completed for EV of Rs 10.8 bn (cash received Rs 5.4 bn balance towards debt) in F3Q21; (iv) on merger with specified subsidiaries, TPWR has received approvals from SEBI and RBI, but NCLT approval is awaited (could take three to six months); (v) Arutmin coal mine licence extended for an initial period of 10 years; (vi) Crisil has upgraded long-term rating of TPWR to AA/Stable and ICRA has revised long-term rating to positive from stable.

Cash flows and balance sheet
(i) CFO in F1H21 was Rs 46.6 bn (F1H20 Rs 32.7 bn); (ii) net debt reduced from Rs 436 bn (F4Q20) to Rs 368 bn (F2Q21). Debt reduced q-o-q: standalone by Rs 29.1 bn, Coal SPV’s Rs 5.3 bn, renewable Rs 3.6 bn and other businesses Rs 4.5 bn; (iii) net debt/equity and net debt/Ebitda have improved to 1.52x and 4x, respectively; (iv) TPWR has incurred capex of Rs 12.7 bn (F2021 guidance Rs 38 bn).

Mundra plant
PLF was 79% (+1,400bp y-o-y). Fuel under recoveries decreased to Rs 0.3/unit (F2Q20 Rs 0.52) – lower spot coal prices and competitive shipments. As of F2Q, Mundra debt was Rs 80.8 bn and management infused cash of Rs 26 bn in Oct-20 and will infuse a further Rs 15 bn in Nov-20, thus bringing external debt to Rs 40 bn and making the project sustainable.

Indonesian coal unit: Production and sales were -11% and -4% y-o-y, respectively. Net realisation after royalty and cost of production (including inventory) were -21% and -15% y-o-y, respectively, leading to gross proft/ton going down by 38% y-o-y. Coal companies are working with contractors to reduce mining costs.

Solar EPC business: Order book is Rs 92.7 bn as of date (2.2GW orders). TPWR is targeting to execute the same over the next 12-18 months and margins are expected to be in high-single-digit levels. Management noted 50% of the order book is captive in nature.