All-round recovery for Tata Power may take a while

Even as renewables begin to add up, balance sheet deleveraging is crucial

About a year back, when Tata Power acquired the business of Welspun Renewables, analysts were quite critical of the deal as they felt that Tatas overpaid Welspun to get a head start in the renewable space. However. September quarter (Q2) performance of Tata Power puts to rest these criticisms. It cushioned the company in Q2 when it had to take an Rs 1,100 crore hit due to Tata-DoCoMo settlement. Q2's revenues rose by seven per cent year-on-year to Rs 7,393 crore. While this may not appear to be a robust growth number, it still bettered the Street's expectation.

If the non-renewables business grew by 12 per cent to Rs 7,637 crore in Q2, the renewables business' revenues more than doubled to Rs 876 crore in Q2, thanks to the Welspun acquisition. While renewables contribute to only 10 per cent of Tata Power's total revenues, its relevance is only expected to move up in the coming quarters. Considering the widening under-recoveries in the Mundra ultra-mega power plant (UMPP), operating profit of Rs 475 crore from its renewables segment was the saving grace in Q2.

Yet, this alone is inadequate to turn the tide in Tata Power's favour. For one, as Sumit Kishore of JP Morgan highlights that amid the ongoing uncertainty related to renewable tariffs in India, new renewable capacity addition plans are on hold at present for the industry. In this light, it remains to be seen how Tata Power can ramp up this business. For the industry, solar tariffs too have lately seen steep correction. While the Welspun assets are secured through long-term power purchase agreements (PPAs), a downward revision in tariffs is a medium-term overhang.

Thermal business too has challenges. While talks are on to sell the assets of Mundra UMPP, the company hasn't guided any timelines. Analysts say the sale may be inadequate to cover up for Mundra's debt of over Rs 10,000 crore and a hit on balance sheet is imminent. The Street would also keep a close check on developments in the Mumbai power generation business given that ADAG group has put its own business on sale, as well as the upcoming renewal of Tata Power's PPAs.

Lastly, there's a list of non-core assets such as investments in Tata Teleservices (Maharashtra), Tata Communications and power-linked residual investments in coal mines in Indonesia (expected to fetch about $400 million), likely to be divested in the coming quarters. Analysts at IDFC Securities say that the triggers for major re-rating are absent for Tata Power stock in the next 12-18 months barring unlocking of value from non-core assets and listing of its renewables portfolio. The timing of such events, however, is also not certain. In this backdrop, analysts feel investors may use the recent rally to book profit on Tata Power stock or show patience.