At Rs 15.9 bn, Tata Power’s normalised Ebitda was in line with our/consensus forecast. While normalised PBT including a share of profits from JVs/Associates less minority interest at Rs 4.6 bn (+28% y-o-y) was marginally above our forecast, normalised PAT at Rs 2bn (-7% y-o-y) came in 28%/41% below our/consensus forecasts. We normalise Q1FY18 reported financials for Rs 1.1 bn exchange fluctuation loss and Rs 750m MTM gain on interest rate swap contracts linked to Mundra. Reported PAT at Rs 1.6 bn (+126% y-o-y) was 42%/51% below our/consensus forecasts. Relative to our forecasts, Mundra and Delhi Distribution (TPDDL) were below par, whereas TPWR Solar, Maithon and contribution from Indonesian coal assets surprised us. Takeaways from Q1FY18 presentation & earnings call
Mundra: Earnings disappointed with a loss of Rs 940m at the Ebitda level (we expected a profit of Rs 490m) and fuel cost under-recovery increased from Rs 0.86/kWh as of Q4FY17 to Rs 0.93/kWh. The weak performance stems from a surprising 2% q-o-q drop in tariff (Rs 2.39/kWh) despite CERC notified sharply higher tariff escalation rates for 1HFY18 and adjusting for maintenance related low plant availability – management attributed this to ‘graded applicability of the CERC escalation factor (we await more clarity) and the appreciation of the Rs vs the $. On a normalised basis, net loss at Mundra increased 20% q-q from Rs 3.7 billion to Rs 4.4 billion.
Mumbai generation/distribution: On the issue of PPA renewals by the Mumbai distribution business (TPC-D), management stated that as the existing PPAs end in March 2018, hearings on the new power procurement mix are going on. Management is confident that the new procurement will continue to be a mix of embedded generation + a bid-based portfolio. Meanwhile, after being static since 2QFY17, regulatory assets (RAs) shrank to Rs 12.7 bn; regulated equity (RE) stood at Rs 37.8 bn.
Coal business: KPC’s net spreads moderated 2% q-q to $22.8/mt as gross realisation was flat q-q at $64/ton. TPWR’s share of net profit of coal + related infra companies in Indonesia almost doubled y-y to Rs 3.4 bn.
TPWR Solar: A big surprise on both revenues and margins (Ebitda was Rs 840m, 42% above our forecast), which translated to a PAT of Rs 440m (nearly double our forecast). Management stated that it is trying to ensure that the order book has a reasonable proportion on international orders.
Renewables: Combined Ebitda contribution for Tata Power Renewable (TPREL) and Walwan Renewable (formerly Welspun Renewable) was up 30% q-q to Rs 4.4 bn. Combined NPAT contribution by the two entities was Rs 840m (vs. Rs 1.5 bn in Q4FY17, which included an Rs 690m tax credit at Walwan Renewable). Management stated that there is no stress in realisation of receivables; receivables for >180 days were negligible.
Delhi Distribution (TPDDL): Ebitda at Rs 2.8 bn (+3% y-o-y) was 9% below our forecast whereas PAT at Rs 840m (flat y-o-y) was 12% below our forecast. Notably, downtrend in RAs continued.
Maithon: Return on regulated equity (RoRE) was 21% (vs. 17% in Q5). While Ebitda was in line with our forecast, PAT at Rs 760m (+12% y-o-y) was 17% above our forecast.
Leverage: At Rs 486 bn, consolidated debt stood largely unchanged from FY17 level, net D/E was 3.1x as of Jun-2017. Management reiterated that monetisation of non-core investments/assets remains work-in-progress, to be completed within FY18.
What next — we are reviewing our forecasts and target price
We believe that TPWR’s earnings growth outlook and impetus to reduce leverage by monetising non-core investments/assets is intact. Maintain Buy; at CMP, the stock trades at FY19F P/E of 11.7x (EPS = Rs 6.8) and P/B of 1.2x (BVPS = Rs 67.8).