Q1FY24 Review: Tata Power: Q1 not so great; tough times ahead

10 Aug 2023 , 11:30 AM

Tata Power (TPWR) Q1FY24 PAT was up 22% YoY, on the back of one-off gains (non-cash). The impact of weak coal prices was not fully offset by lower losses at UMPP + EPC + Odisha discom + Tata Projects, etc. TPWR does not seem to be concerned about weak coal, given the hedge at UMPP. However, analysts of IIFL Capital Services cut FY24/25 PAT by 10-23%, and see further downside if weak coal persists. Valuations are demanding; they await a better entry point. 

Earnings beat on non-cash gains: 

TPWR’s reported PAT was up 22% YoY, ahead of forecasts, as it booked Rs2.3bn non-cash income towards profit on dilution of investment (Tata Projects); net of this, the performance was weak as the impact of 71% YoY fall in coal profits (weak pricing) was not fully offset, despite 83% YoY lower losses at UMPP (S/11, pass-through of fuel), 617% YoY increase in Odisha discom PAT, turnaround in the solar EPC business and 88% YoY reduction in losses of Tata Projects (30.8% stake vs 47.8% YoY). Earnings could have declined, but for the Rs1bn favourable tariff order at Maithon IPP + 89% YoY increase in treasury income. 

Weak coal, but firm on RE: 

During the earnings call, TPWR MD stated: 1) Technical issues encountered by one unit of UMPP have been addressed, for which the cost recovery would improve QoQ. Further extension of S/11 is likely, but not the base case. 2) While the outlook on coal prices is weak, turnaround in UMPP offers some offset. 3) Solar module prices have collapsed, which bode well for solar rooftop + EPC business (order book: Rs176bn). 4) 4GW module / cell units should be ready by Q3/Q4FY24, and improve earnings; their economics are intact given the 40%/25% import duty. 5) RE unit is well geared to add 2-3GW capacity and drive earnings. 

Cut earnings by 10%-23%: 

Analysts of IIFL Capital Services factor in US$95/MT coal + S/11 in FY24, for which earnings cut is only 10%; while it is 23% for FY25 and may swing back if S/11 continues for UMPP. US$10/MT lower coal = 14% change in PAT, for which the earnings visibility is poor. The stock is not cheap and does not offer a margin of safety; REDUCE. Further collapse in coal prices may risk TPWR’s growth ambitions.