Adoption of Ind-AS has led to a distortion in revenue and Ebitda
Weak performance at Mundra further distorted by Ind-AS: Tata Power reported weak earnings owing to (i) unfavourable tariff order in the standalone business leading to a loss of R620m, and (ii) low plant availability at Mundra leading to fixed cost under-recovery of R900m.
Adoption of Ind-AS has led to a distortion in revenue and Ebitda as the coal business moves to equity method of accounting, and specific power assets are treated as financial leases.
Maintain ADD rating with a target price of R80/share (from R76 previously).
Consolidated earnings marred by under-recovery at Mundra, negative tariff order for Mumbai
Tata Power’s consolidated earnings were impacted by (i) negative tariff order of R620m for the Mumbai operations, (ii) under-recovery of fixed cost at Mundra UMPP of R900m that will likely be reversed in the course of the year, and (iii) lumpy cost of dredging at Mundra (R350m) during the quarter. Reported profits also include forex losses of R1.6 bn pertaining to mark-to-market of forex liabilities. Reconciliation of estimates (prepared under I-GAAP) with reported numbers may be futile as the coal business, Tala transmission and IEL have moved to an equity method of accounting, while the assets at Jojobera have been recognised as financial leases under Ind-AS.
Standalone earnings were lower due to absence of dividend income from coal business
Tata Power’s standalone earnings came in at R1.5 bn (KIE R3.3 bn) primarily on account of reversal of prior period revenues of R620m and the absence of dividend income from coal subsidiaries (R950m in Q1FY16) that led to lower other income.
Operations at Jojobera were accounted as financial lease, and hence they were not accounted for in revenues and to that extent led to lower Ebitda compared to our estimates.
Standalone earnings were also impacted positively by accrual of notional interest on interest free loans given to Mundra UMPP. Reported profits in the standalone business include forex losses of R180m.
Maintain ADD rating, resolution of Mundra appears in sight and coal prices are on the rise
When reconciling the new accounting standard, two key positives that come out are (i) coal prices are on the rise and will likely lead to margin expansion in the coming quarters for consolidated earnings, even though there may be some offsetting cost increases, and (ii) the Supreme Court has asked Central Electricity Regulatory Authority (CERC) to give its inputs on the ruling of the APTEL by September 14, 2016, by which date SC will hear the case.
We have revised our earnings estimates to factor in changes for adoption of Ind-AS, that yield little revision in net income estimates, while re-aligning revenues and Ebitda; we seek further clarity on accounting treatment of financial leases as well as the revised balance sheet as per Ind-AS.
Lower availability hits CGPL, expected to normalise through the year
Coastal Gujarat Power Limited (CGPL) reported PAT loss of R3.9 bn in Q1FY17, 147% higher than the loss of R1.5 bn reported in Q1FY16 (under Ind-AS). The sharp decline in earnings was led by the lower availability of the plant during the quarter on account of maintenance/overhaul schedule.
The PAF for the quarter stood at 63%, sharply below the normative PAF of 80% leading to a fixed cost under-recovery of R900m.
Accordingly, Ebitda for the quarter stood at R2.2 bn, down 31% y-o-y. Ebitda was also impacted by the dredging cost of R330m that is incurred once every year.
However, the company is confident that it will be able to maintain higher-than-normative PAF (over 80%) in the rest of
the year to meet the PAF requirement for the year as a whole and thus will be able to recover the full fixed charge. Generation was lower by 14% y-o-y at 5.4 BU (sales at 5 BU) at a PLF of 63% (versus 73% in Q1FY16).
The impact at the revenue level was increased by the lower fuel cost (US$42/tonne, down 19% y-o-y) in the indexed energy charge mechanism (R1.7 bn impact). The revenue for the quarter thus stood at R12 bn, down 18% y-o-y. Revenue realisation stood at R2.4/kwh, down 5% y-o-y in Q1FY17.
The company expects the finalisation of compensatory tariff at CGPL by the first week of September 2016.
It mentioned that the plea of the procurers against the APTEL order on force majeure considerations is up for hearing in the Supreme Court on 14th of September and the court requires the CERC decision before the hearing.