FY17 Annual Report Update: Optimised CGPL’s capital structure; Raising estimates. Post analysing Tata Power’s (TPWR) FY17 annual report, we have raised our estimates. CGPL gets Rs 45 billion quasi equity; another Rs 29 billion needed over three years. CGPL’s (Coastal Gujarat Power, Mundra) EBITDA declined 58% y-o-y to Rs 5.4b in FY17, as fuel under-recoveries nearly doubled to Rs 0.58/kwh (Rs 15 billion). Finance cost declined 48% y-o-y to Rs 6.8 billion on conversion of Rs 45 billion in quasi equity. FCF generation improved due to a sharp increase in trade payables to 145 days, historical low capex of Rs 467 million, and lower interest payments. We are raising estimates for CGPL, given higher fuel price increase by CERC (v/s our estimate) for escalable portion of fuel cost, lower PLF and a stronger rupee.
CGPL will require Rs 29 billion equity infusion or re-financing to meet Rs 20 billion debt repayments and fund negative free cash flows over FY18-20E. Coal JVs are funding negative free cash flows (some of under-recoveries) at CGPL Coal JVs’ disclosure has improved. PAT grew 5x y-o-y to Rs 6.7 billion and dividend payout was 56% in FY17. Rs 3.7 billion dividend from coal JVs nearly offset the Rs 3.3 billion negative free cash flow (FCF) at CGPL. Coal prices are expected to drive 40% PAT growth in FY18. We expect 100% payout by coal JVs with effect from FY18. Delhi distribution is generating strong FCF on working capital release and a recovery of regulatory assets, but regulated equity growth is muted. Despite capex of Rs 8 billion in the last two years, Delhi’s reported regulated equity is broadly unchanged at Rs 11.6b in FY17. Consolidated net debt to EBITDA ratio rose from 5.1x to 6.4x under Ind-AS on exclusion of JVs.
We expect leverage to decline due to the lack of value-accretive re-investment opportunities, as management highlighted pulling back from investment opportunity in RE due to intense competition. Net worth has become volatile due to fair value accounting under Ind-AS. It no longer represents the historical meaning of shareholders’ contribution and retained earnings. Therefore, we abandon P/BV basis for valuations and switch to SOTP-based valuation. Maintain ‘Sell’ rating with an SOTP of Rs 71.