Tata Power: One more hurdle crossed

CERC order lifts earnings visibility even though compensatory rate allowed is lower than expectation

The long-awaited compensatory tariff computation by Central Electricity Regulatory Commission (CERC) was finally announced earlier this month. Even as the quantum of award was a disappointment to the Street's expectation (Rs 0.05 per kilowatt hour or kWh versus expectation of Rs 0.27 per kWh), most analysts see this positive verdict as one hurdle crossed. The arrears of tariff relief since commissioning of the 4,000MW Mundra ultra mega power plant in 2013 will be paid in six equal monthly instalments by the procurers (largely states) from the date the CERC order is permitted to be implemented by the Supreme Court. And the amount is significant.

"As against the compensatory tariff of Rs 3,700 crore year-to-date (YTD) till FY16 as per the old calculation, the actual recovery will be Rs 1,650 crore (without considering coal profits) or Rs 6 per share of increase in cash", says Rahul Modi of Antique Stock Broking.

Though lower than anticipated, analysts feel the order would have a positive implication in revenues and net profit of Tata Power going forward as well. Analysts at JP Morgan estimate that the relief by CERC would in turn boost earnings per share (EPS) by Rs 2 in FY18. "Almost half of the 84 per cent EPS growth in FY18 is premised on tariff relief for Mundra on a prospective basis," the analysts say. They add that the consolidation of the Welspun acquisition, the profit contribution of newly commissioned overseas renewable projects and higher profit contributions from Indonesian mines would also augment the earnings. "If growth materialises as expected, Tata Power will see return on equity improve to 13.5 per cent versus 8.6 per cent in FY16", the analysts sum up.

While the development is positive, analysts prefer to wait for the Supreme Court decision as it needs to be seen if CERC's computations are upheld by the country's highest court. But, even if the Supreme Court order is not favourable, it would not have much downside risk to Tata Power's stock as the Street was not ascribing much relevance to the compensatory tariff even prior to CERC's tariff computation. On the other hand, if the court revises the compensation upwards, it could boost sentiment and financials of Tata Power.

The same, however cannot be extended in case of Adani Power's power project as the company has already accounted for under-recoveries in fuel pricing. Analysts at Nomura feel that with the compensatory tariff falling short of expectation for Adani Power (37 per cent lower than the estimated relief of Rs 0.44 kWh), lower tariff relief and write-back of previously booked compensatory tariff may adversely impact near-term earnings as well as stock price performance.