BEST PPA brings earnings visibility for Tata Power
A muted reaction to the Tata Power-BEST PPA deal suggests that investors are awaiting bigger triggers—such as resolution of the Mundra power plant issue—before considering any rerating of the Tata Power stock
Year 2019 began on a positive note for Tata Power Co. Ltd. The Maharashtra Electricity Regulatory Commission has allowed the Brihanmumbai Electric Supply and Transport Undertaking (BEST), provider of electricity in Mumbai, to extend its existing power purchase agreement (PPA) with Tata Power.
The current agreement for 677 megawatts expires in March this year. The extension lets the company supply the stipulated power for another five years, providing earnings visibility.
The agreement will let Tata Power continue to derive an annual profit of about ₹150 crore, amounting to 11% of FY18 standalone profit, show calculations by analysts at SBICAP Securities Ltd. “As per the latest tariff order Tata Power’s Mumbai-based power generation capacity is entitled to earn ~₹3billion/year of profit on approved regulated equity of ~₹20billion at 15.5% return on equity,” the brokerage firm said in a note. “Around 50% of the capacity is currently sold to BEST and the balance is sold to the distribution entity of Tata Power for the Mumbai distribution area. With the extension of the PPA with BEST the risk of the ~₹1.5-1.75billion on consolidated profit is behind Tata Power and provides earnings visibility for the next five years.”
Still the development did not lead to earnings upgrades as most analysts were expecting BEST to continue the PPA. “While we were already factoring in the continuation of the PPA, the development removes uncertainty,” said Motilal Oswal Securities Ltd. Even so, as the muted reaction in the stock suggests, investors are awaiting bigger triggers before they consider any rerating.
One is the relief from the loss-making Mundra ultra-mega power plant, which is in the works. Second is balance-sheet deleveraging, which the company has promised and is pursuing. Positive developments on this over the last year notwithstanding, the Tata Power stock trailed the broader market.
The underperformance underscores investor concerns about the timing and the quantum of relief for the Mundra plant. The relief is contingent on five states consenting to tariff ratifications. While Gujarat has agreed to provide relief, other buyers (states) are yet to provide their consent. Also it is not clear if the states will ratify the tariff agreement before or after the general election.
“The big challenge is how Mundra power plant issue will get resolved,” says an analyst with a domestic broking firm. “If the resolution is going to happen after the general election, I would rather wait before getting constructive on the stock.”
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