Prospects brighten for Tata Power

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The scrip gained over 3% intra-day on the back of the convincing numbers reported in the March 2016 quarter (Q4 FY16). Consolidated revenue at Rs 9,375 crore was up 19% year-on-year with improved performance of key units such as Maithon Power, Delhi discom, power trading unit and solar manufacturing plant. Consequently, net profit at Rs 360 crore more than doubled in Q4 FY16 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. Apart from a better-than-expected profit for Q4 FY16, the management commentary was also positive suggesting that the 5% year-on-year growth in power generation witnessed in FY16 is sustainable for Tata Power. The management is also confident of near-term resolution in its long-pending dispute on compensatory tariff for the 4,000 MW (megawatts) Mundra ultra-mega power plant (UMPP). Decision from (CERC), expected in July, 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 company has not accounted for the incremental gain.

The bright spots in Q4 results are the Mundra posting net profit of Rs 9 crore and the 1,050 MW Maithon plant operating at 100% efficiency as it tied up 150 megawatts power with Kerala electricity board in Q4 FY16. A near doubling of income in Tata Power Solar (manufacturing photovoltaic products) to Rs 429 crore in Q4 FY16 also augurs well and with the focus on solar energy rapidly increasing, performance of this division is expected to remain buoyant going ahead.

However, higher power purchased in Q4 FY16 kept Tata Power’s overall operating margin suppressed at 20.4% (down marginally by 20 basis points year-on-year). The benefit of lower coal prices too seem to be narrowing (down 1.4% year-on-year in Q4 FY16). As the management indicates, for an increase in fuel costs, operating margin may come under pressure in FY17, if the current level of operating efficiency is not maintained.

While analysts at Nomura feel that the positive surprise is operations at turning profitable, the Street is a bit wary of whether March 2016 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 the Tata Power stock pared its early gains to close higher by just about 1.4% on Tuesday.