Tata Power: No basic disappointment

Even as consolidated revenues grew decently, one-off costs, write-offs weighed on profit

A look at Tata Power's December 2015 quarter (Q3FY16) results suggests gross slippage in profit, which was down 88 per cent at Rs 24 crore (versus estimates of Rs 300 crore). But this should not deter investors as certain regulatory accounting adjustments and recognition of impairment loss on Indonesian coal assets have been the culprits in dragging Tata Power's Q3FY16 performance.

That it managed to post consolidated income at Rs 9,230 crore, up nine per cent year-on-year, on a par with market estimates, is a positive takeaway from the December quarter results. Lower cost of coal and its improved availability aided the profitability as operating profit at Rs 2,472 crore in Q3FY16 more than doubled (Rs 1,179 crore in Q3FY15), while operating margin expanded from 14 per cent in Q3FY15 to 26 per cent in Q3FY16. Loan restructuring efforts have helped maintain interest outgo at Rs 855 crore.

Stand-alone performance reflects a similar picture, while subsidiaries such as Maithon Power and Tata Power Trading have fared well in the December quarter. Despite low off-take from some of its new mining pits in Indonesia, sales from foreign mines were maintained at 21 million tonnes. But, realisations dipped to $42 per tonne (from $52 per tonne in Q3FY15).

Net profit at Rs 24.5 crore was hit by one-offs such as Rs 600-crore of expenditure recognised in regulatory businesses and Rs 187 crore of exceptional losses (net of goodwill impairment of Rs 2,570 crore in Indonesian subsidiary and Rs 2,320 crore of reversal of earlier recognised impairment loss in Mundra plant).

Motilal Oswal Research estimates the net profit adjusted for one-off at Rs 350 crore; higher than its expected figure of Rs 300 crore. This justifies why brokerages such as Axis Capital, JPMorgan, B&K Securities, and Ambit Capital (polled on Bloomberg) retain their 'buy' recommenadtion on Tata Power. Sanjeev Zarbade of Kotak Securities says with these one-off unlikely to recur, Q4FY16 should be better, given the softening of coal prices, though it may be partly reduced by rupee depreciation.

That apart, the likely verdict on compensatory rate for Mundra plant expected in Q4FY16 augurs well for the company. A possible part-retirement on debt on mine acquisition will be positive as Tata Power continues to pursue sale of its Indonesian coal mines (though there is little clarity on timelines).