Shares of Tata Power Co. Ltd and Adani Power Ltd rallied 13-18% on Monday after the Supreme Court directed the Central Electricity Regulatory Commission (CERC) to decide on relief for the imported coal-based plants run by these companies. The Gujarat government sought relief for these plants after the companies expressed their inability to run these plants because of heavy losses. As pointed out earlier in this column, much depends on the consent of other stakeholders (consumers and states apart from Gujarat) and the compensatory mechanism.

Still, the development is seen to have given a leg-up to the resolution process. So much so that investors gave little importance to the company’s subdued financial performance.

The Supreme Court direction came as Tata Power released its September quarter (Q2) results.

Consolidated revenues increased 9.4% from a year ago. Reported profit jumped 85% to 393 crore. Though optically encouraging, the actual operating performance remains subdued. The revenue growth is driven by the capacity expansion in renewable energy.

Profit was aided by a favourable regulatory order and lower tax expense. Operating profit or Ebitda (earnings before interest, tax, depreciation and amortization) for the quarter is up just 3.3% from the year ago. Operating profit at standalone level is down slightly (-0.7%).

To be sure, earnings of the regulated businesses (power distribution, generation tied-up with contracts) do not see significant movements on a quarterly basis.

Further, they are influenced by regulators’ orders. Even so, operating profits at the consolidated level are down 2.6% in first half of the fiscal year.

Progress on other parameters such as balance-sheet deleveraging is also slow.

Net debt-to-equity as of last quarter stood at 2.27 times, down from 2.9 times from a year ago. But compared to 2.26 times at the end of the June quarter, the leverage ratio did not see improvement.

Further, losses at its troubled Mundra ultra mega power plant jumped 37% from the year ago quarter to 463 crore. If not for the low utilization of the Mundra plant, losses would have been notably higher. As coal prices rose, fuel cost under-recovery increased to 83 paise per unit from 69 paise a year ago.

Perhaps investors are looking ahead to a scenario where a resolution plan will end losses at the Mundra power plant. Such an outcome even on a prospective basis will aid valuations.

Right now, Tata Power as a consolidated entity is absorbing the losses. As a consequence, analysts ascribe negative value to the Mundra power plant. This will reverse if a resolution ends losses. But as pointed out earlier, much depends on the scheme or the offer.