Improving demand, merger plan charge up Tata Power's outlook; shares up 8%

Topics Tata Power

The power generation and distribution major is also working towards significantly lowering debt
Shares of Tata Power surged around 8 per cent after the company announced June quarter (Q1) results and the merger of its subsidiaries, a step towards simplifying its holding structure.

The company expects the merger of subsidiaries such as Coastal Gujarat Power (CGPL), Tata Power Solar Systems (TPSSL), and Af-Taab Investment Company (AfT­a­ab) with the parent to lead to greater syne­r­gies in financing, compliance, and oversight. Analysts say the much-needed simplification is a positive, and the merger of the 4,000-megawatt Mundra UMPP (CGPL) will also bring in incremental financial and tax efficiencies. While they are watchful of the benefits of the merger, as the subsidiaries are into diversified businesses, the company’s overall outlook continues to improve.

The power generation and distribution major is also working towards significantly lowering debt. In Q1, it sold a South African joint venture (for about Rs 660 crore) and ships for $212.76 million (about Rs 1,600 crore), and consideration for these have been received. With some part of the payment falling in Q1, coupled with better working capital management, this has led to net debt reducing by Rs 3,500 crore to Rs 40,099 crore. The company plans to reduce net debt by Rs 25,000 crore by the end of financial year 2020-21 (FY21).

Tata Power has already announced that it is issuing 490.57 million equity shares on a preferential basis to Tata Sons at Rs 53 apiece, which will bring in Rs 2,600 crore. Apart from reducing debt, the move should boost investor confidence since the group’s ownership in the power generation and distribution arm will increase to 46.9 per cent, from 37.2 per cent. Although equity-dilutive in nature, the move is earnings-neutral, say analysts, given the savings on interest costs.

The sale of its defence business is also expected soon. While this might mean some lost opportunity in a sunrise sector, it will help lower debt and avoid commitment of significant investments in the capital-intensive business.

 

 
What’s more, the company’s plan of setting up an InvIT (infrastructure investment trust) for the renewable business will cut debt further, and reduce investor concerns.

On the business front, the company took over management of Central Electricity Supply Utility of Odisha for distributing and supplying electricity in the state’s five circles of Bhubaneswar, Cuttack, Puri, Paradeep, and Dhenka from June 1, which should aid growth.

Secondly, while analysts await regulatory clearance of pending supplementary power purchase agreement (PPA) between Tata Power’s Mundra plant and the Gujarat government, Rupesh Sankhe at Elara Capital says the positive developments on supplementary PPA in Maharashtra raises confidence of a favourable amendment in Gujarat, too.

Resolution of underrecovery on the Mundra UMPP, potential investment in renewable InvIT and continued deleveraging of the balance sheet through sale of non-core assets are key near-term triggers, say analysts at Kotak Institutional Equities.

The company’s sales declined 12 per cent year-on-year (YoY) in Q1, impacted by weak demand and lower solar EPC project revenue because of the lockdown. Ebitda (earnings before interest, tax, depreciation, and amortisation) declined at a slower pace of 7 per cent, helped by lower fuel costs. The 19-per cent YoY fall in other income and rising depreciation, however, meant that pre-tax profit declined 32 per cent YoY.

The worst, though, might be over, as power demand is improving and has reached pre-Covid levels from June.

Analysts at Motilal Oswal Financial Services expect earnings to increase at a compound annual growth rate of 9-10 per cent during FY20–23 and say the approval of a tariff hike at Mundra, possible benefits from the merger of CGPL and Tata Power Solar with the parent, and favourable InvIT valuations (expected) provide upsides.


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