No respite from woes at Tata Power
Adjusted for a reversal of a large impairment charge it took earlier, the profit for the March quarter is estimated to have fallen, according to two domestic broking firms
Tata Power Co. Ltd’s profit for the March quarter has not impressed investors. The stock’s losses so far this year are more than 10% and the sell-off has continued despite the company announcing some long-awaited deleveraging measures.
At the core of the problem, as Motilal Oswal research points out, is the lack of earnings or returns on equity accretive growth opportunities. Without this, the situation at Tata Power more or less remains the same, with the company incurring large impairments, write-backs and sluggish earnings.
Adjusted for a reversal of a large impairment charge it took earlier, the profit for the March quarter is estimated to have fallen, according to two domestic broking firms.
Tata Power is expanding in the renewable energy sector, but cut-throat competition means returns will likely be capped. With the proceeds of the recent asset sales yet to be realized, net debt including perpetual securities is unchanged, points out Motilal Oswal research. The reduction in leverage ratio last quarter is largely attributed to the reversal of impairment charges.
In essence, the deleveraging process is yet to bear meaningful results. Meanwhile, losses at the Mundra ultra mega power project rose sharply, tracking the rise in fuel costs. Fuel cost under-recovery last quarter increased to 93 paise per unit from 85 paise a year ago, while output at the coal business, which is expected to insulate Tata Power from fuel price shock, stagnated because of a limit on maximum production for the year.
True, the divestment proceeds will materialize this year, helping the company pare debt. However, apart from the reduction in finance costs, analysts are not seeing any major boost to the earnings.
With no viable solution in sight at the troubled Mundra plant, analysts fear losses at the unit will continue to suppress overall earnings of the company. “Tata Power has entered into an agreement to sell its investment in Tata Communications and also in the strategic defence business unit (SBU). We expect the sale to be executed in FY19, generating after-tax cash inflow of Rs30 billion. We also increase our coal price estimate from $70/ton to $80/ton,” Motilal Oswal research said in a note.
“However, accounting for higher losses at Mundra, excluding earnings from Tata Communications and SBU, and making other adjustments, the PAT estimate is cut by around 12%/1% for FY19E/20E, respectively,” it added.
As such, the March quarter results do not show any material improvement at Tata Power. Rather, losses at the Mundra power plant have expanded and it is not yet clear when investors will see net benefits from the deleveraging process.
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