Graphic: Ajay Negi/Mint
Graphic: Ajay Negi/Mint

Tata Power Q2 results: High coal prices drive profit, Mundra compensation key

The recent rebound in coal prices is likely to benefit Tata Power in the current quarter also

The Tata Power Co. Ltd stock gained 2.4% on Wednesday after the company reported a profit of Rs336 crore for the September quarter. In the year-ago quarter it lost Rs96 crore.

The firm benefited from higher coal prices, dividend income and low finance costs. Barring two units, all key subsidiaries generated operating profits and several reported better operating profits.

The coal business was the star performer. As prices rose, the firm sold 14% more coal.

True, high prices have hurt its ultra-mega power plant at Mundra, Gujarat. Under-recoveries rose and losses at the plant continued. But that did not come as a surprise as the plant was anyway stuck in unfavourable offtake agreements. What stood out is better operating performance. Availability of the plant rose—it’s up from 77% a year ago to 85% in the last quarter. This improved fixed cost recovery.

Revenues at the stand-alone company level fell due to low power demand and offtake. But that did not percolate to earnings—profit was up 26% at the stand-alone level—thanks to high dividend from shipping and investment subsidiaries.

Overall the performance was satisfactory. Tata Power revised downwards the previously agreed sale consideration for its Indonesian asset PT Arutmin. But the change in consideration is due to adjustments related to prior period liabilities, past claims and statutory obligation and not due to valuation write-down, the company clarified, says an analyst who attended the conference call.

ALSO READ | Tata Power cuts sale consideration for Arutmin mine in Indonesia to $246 mn

The recent rebound in coal rates is likely to benefit Tata Power in the current quarter also. Of course, firm coal prices will undermine the Mundra power plant’s profitability. But as analysts point out, at the company level Tata Power is net long on coal, in terms of its share in coal generation and usage at the Mundra plant. So it can see material benefits from higher coal prices.

That does not mean investors should overlook losses at the Mundra plant, which has been a wealth destroyer in recent years. Due to large investment, resolution of compensation (for cost under-recoveries) for this plant remains a key earnings trigger for the company and for the stock. “Our sensitivity analysis suggests a likely tariff hike of (around) 39 paise for Mundra for FY17, which will translate into PBT of Rs5.7 billion vs reported loss of Rs2.1 billion in FY16," Ambit Capital Pvt. Ltd said in a note last month. PBT is profit before tax and FY is short for fiscal year.

That said, the September quarter results show the company’s non-Mundra investments are bearing fruit. If power demand picks up, these investments stand to do better. While that should hold Tata Power investors in good stead, compensation for the Mundra power plant remains a key variable.