The Tata Power Co. Ltd stock gained 2.2% on Friday, 5 February, as investors hoped that the falling coal prices would help boost its profits. But, for an integrated power company such as this, the falling coal prices are a double-edged sword. Not only did Tata Power post an 87% drop in December quarter consolidated net profit, at Rs.24.5 crore, they were just about one-tenth of analyst estimates.
That the falling fuel prices is not the manna investors want is clear from this piece of statistics: Tata Power was able to reverse the impairment loss from its Mundra power plant by Rs.2,320 crore. However, the firm had to provide Rs.2,507 crore as impairment of goodwill in its Indonesian coal mines. Thus, the net impact was a one-time expense of Rs.187 crore.
While the declining coal prices did help the Mundra plant’s profitability—losses narrowed to Rs.157 crore against Rs.243 crore a year ago—they weren’t alone able to significantly lift the numbers of the power business.
Power segment revenue fell 2.27% from a year ago, thanks to the lower pass through cost of fuel. Power segment earnings before interest and taxes (Ebit) also declined 9% from a year ago; this was mainly owing to an adverse tariff order on the company’s power distribution subsidiary in Delhi. The coal segment’s earnings fell more. Revenue in this business decreased 8.65% from a year ago while Ebit was one-fifth that of the December 2014 quarter.
While the company was able to save on finance costs through refinancing its loans, a foreign exchange hit of Rs.60.8 crore, compared with a Rs.421 crore gain in the year-ago quarter eroded its bottom line.
While Tata Power’s story is a clear example of the overall woes affecting the power sector, its shares have suffered more. They have lost almost one-fifth of their value this fiscal, underperforming the BSE Power index.
That said, it is debatable whether earnings alone would lift the stock. There are no big ticket projects in the offing. The long awaited order on the compensatory tariff issue and the stake sale in the Arutmin coal plant, for which a deal was signed in November 2013 (and which is yet to be completed), would be the triggers to watch out for.