Q3FY23 Review: Tata Power: Coal and CERC order drive growth

6 Feb 2023 , 02:35 PM

Tata Power (TPWR) Q3FY23 PAT was up 122% YoY, on the back of firm coal and favourable CERC order.

TPWR’s Q3FY23 PAT growth of 122% YoY was driven by strong performance of coal SPVs and favourable tariff order at Mundra. Reversal of deferred tax liability contained profit growth. Performance of RE subsidiary was muted; EPC segment disappointed (sales down + margin pressure), while lower PLFs and higher interest cost affected utility earnings. Performance of discoms was mixed – Odhisha circle earnings fell sharply (provision on bad debts), while Delhi and Mumbai were flat; performance of IPPs was flat. As such, it was another quarter where profits were driven by Commodity business (coal).

During the earnings call, TPWR shared: 1) Given impending power shortage, states may agree to negotiate Mundra UMPP PPA (complete fuel pass-through) at a time when outlook on coal prices is firm. As of Q4, it is operating only one unit at Mundra; and in case Gujarat does not offer attractive tariff, may shut it down as well. 2) Correction in module / cell prices should offer tailwinds for RE business, where it targets to add 2GW capacity p.a. 3) It has EPC order book of Rs154bn, where execution should improve and with completion of module mfg. unit (FY24), should improve competitiveness. 4) Demand growth is healthy at each of the discoms (Mumbai, Odhisha and Delhi), and it remains committed to lower AT&C losses that would drive earnings. 5) It will continue to explore opportunities in T&D for business growth.

Analysts of IIFL Capital Services upgrade FY23/24 PAT by 27/9% to reflect the YTD performance. If UMPP tariff is negotiated, earnings upgrade is steep at 40-60% for FY24/25. Correction in module prices should help RE and EPC segments. To reflect CERC’s favourable order for Mundra UMPP for supply of power under govt directive, they upgrade FY23 EPS by 27%; the 4-9% upgrade in FY24/25 PAT is on account of firm coal and ramp-up in EPC. As such, a turnaround in UMPP can further swing FY24/25 PAT by 40-60%. At 20x FY24 PAT, the stock seems to be well reflecting possible turnaround in UMPP and firm coal prices.

Analysts of IIFL Capital Services maintain reduce with target price of Rs 200.