Prospects brighten up for Tata Power

Net profit doubled to Rs 360 crore in the March quarter; sustainability holds key

The Tata Power stock gained three per cent intra-day on Tuesday on March quarter (Q4FY16) results. Consolidated revenue at Rs 9,375 crore was up 19 per cent year-on-year (y-o-y), with improved performance of units such as Maithon Power, Tata Power Delhi Distribution, Tata Power Trading, and Tata Power Solar. Net profit at Rs 360 crore doubled in Q4 and was ahead of the Bloomberg estimate at Rs 277 crore. This was despite the company recognising one-off impairment loss of Rs 93 crore on its foreign associate, OTP Geothermal Pte. Apart from a better-than-expected profit, the management commentary was positive, suggesting the five per cent y-o-y growth in power generation witnessed in FY16 is sustainable for Tata Power. The firm is confident of near-term resolution in its long-pending dispute on rate for the 4,000-Mw Mundra ultra-mega power plant (UMPP). The Central Electricity Regulatory Commission (CERC)’s decision could result in Rs 3,000 crore of incremental revenue. While one cannot rule out the possibility of the state electricity boards (SEBs) challenging the CERC's order if it favours Tata Power, the firm has not accounted for the gain.

The bright spots in Q4 results are the Mundra UMPP net profit of Rs 9 crore and the 1,050-Mw Maithon plant operating at 100 per cent efficiency as it tied up 150 Mw with Kerala SEB in Q4FY16. A near doubling of income in Tata Power Solar (manufacturing photovoltaic products) to Rs 429 crore in Q4FY16 augurs well and with the focus on solar energy increasing, the performance of this division is expected to remain buoyant.

But higher power purchased in Q4FY16 kept Tata Power's overall operating margin suppressed at 20.4 per cent (down 20 basis points y-o-y). The benefit of lower coal prices seems narrowing (down 1.4 per cent y-o-y in Q4’FY16). As the management indicates for an increase in fuel costs, operating margin might come under pressure in FY17, if the current level of operating efficiency is not maintained.

While analysts at Nomura feel the positive surprise is operations at Mundra plant turning profitable, the Street is a bit wary of whether the March’16 profitability is sustainable. “While March was a good quarter, we would wait till the second half of FY17 to see if profitability is maintained,” says an analyst from a domestic brokerage.

It is perhaps for this reason that Tata Power’s stock pared its early gains to close higher by 1.4 per cent on Tuesday.