Shares of Tata Power Co. Ltd predictably fell after it reported a consolidated loss of Rs 628.75 crore in the March quarter.
The losses were mainly because of a Rs 815 crore impairment charge the firm took on its Mundra factory, which continues to cloud its prospects.
Operationally, things weren’t too bad even if power generation (for the parent company, excluding units such as Mundra and Maithon) remained more or less flat from a year earlier.
Consolidated revenue grew 44% from a year ago, helped by newer plants such as Maithon, and more coal sales.
Despite fuel costs soaring 63.7%, Tata Power managed to increase operating profit by 19.4%.
The coal business increased its earnings before interest and tax (Ebit) by 11.4%. But despite increasing sales, higher realizations and help from a depreciating rupee, profitability from this business slipped.
Ebit margin narrowed by almost 5 percentage points due to a provision of Rs 324.70 crore for deferred stripping costs (a technical term related to coal mining) at its Indonesian mines.
Needless to say, the power business did worse. It was able to raise Ebit by only a tepid 6.5% over a year ago, owing to operating losses at Mundra.
Mundra, which will eventually add 4,000 megawatts (MW) of capacity, is contracted to sell its output at Rs 2.26 a unit; its first 800MW plant started production in March. But at $100 (around Rs 5,600 today) per tonne of coal, the variable cost itself comes around to Rs 2.20 per unit, according to brokerage firms’ estimates.
To be sure, Tata Power has said that the Mundra unit has started to blend low-grade coal, which should bring down fuel costs, but there isn’t much clarity on that.
While the company has taken impairment charges of Rs 1,800 crore in fiscal 2012 on Mundra citing revised assessments of fuel, forex and operating costs, is it safe to assume that these are one-offs? Avendus Capital estimates that this unit will incur losses of Rs 3,400 crore over the next two fiscals.
In its notes to accounts, Tata Power has said that it wasn’t able to meet some financial covenants on loans taken by the Mundra unit because of the impairment loss. Further, the firm has said that it is planning to transfer at least 75% of equity interest in its Indonesian coal mines to this unit in order to support its cash flows. In other words, the dividends from the coal business would probably help service the Mundra debt.
That power factory will continue to determine the fortunes of the stock over the medium term.
Also See | Quarterly performance (PDF)