Tata Power Co. Ltd’s shares lost 5% on Monday, extending their underperformance compared to the Nifty 500 index so far this fiscal year. The company’s December quarter results, announced towards the end of market hours on Monday, fell short of expectations. Profit from continuing operations at 239 crore missed Street estimates by a wide margin.

Primarily, a spike in losses at the Mundra ultra-mega power plant undermined the company’s earnings. Increase in power generation (tariffs are partially fixed) and a weak rupee accelerated cash burn at the Mundra plant, where loss per unit expanded to 95 paise from 78 paise per unit in the year-ago quarter. As a result, operating losses stood at 101 crore. Now, add finance costs and depreciation to that and losses have more than doubled at the net level.

Sure, the coal business and related infrastructure activities used to cushion Tata Power against the high fuel costs to some extent. However, this time around, that comfort was lower as well. Increase in production costs and higher royalties meant earnings from the coal business came under pressure. Coal business gross profit dropped to $14 per tonne for the December quarter from as much as $24 per tonne in the same period last year. “Coal companies’ profit (came) under pressure due to domestic market pricing obligations and increase in fuel prices," Tata Power said in a statement.

(Sarvesh Kumar Sharma/Mint)


The Delhi distribution and power trading businesses fared well. But earnings contribution from the renewable power business lagged due to lower wind power generation and higher expenses. Cumulatively, the company’s reported earnings at the consolidated level lagged estimates.

This is despite the fact that consolidated revenue grew 16%, helped by higher electricity generation and addition of renewable power capacities.

On the brighter side, Tata Power has made notable progress on balance-sheet deleveraging. Debt-equity ratio declined to 2.24 times from 2.48 times at the end of FY18, thanks to stake sales in non-core businesses and repayment of loans.

The Gujarat government has approved the high-power committee report seeking relief for imported coal-based plants (Mundra power plant is part of this) on under-recoveries owing to cost. The company says discussions are on with other states as well. The coming general election is expected to aid the seasonal increase in electricity demand, benefiting utilities. Tata Power is well-placed to capture the demand as it is present in both generation and distribution segments.

For investors, however, much depends on the relief for the Mundra power plant. Some worry that states may be reluctant to renegotiate ahead of the general election and that would push the negotiations to the next fiscal year. While much of this is conjecture at the moment, the timing and quantum of relief will be a critical factor for the Tata Power stock’s revival. Monday’s drop in share price and the steep underperformance over the past year suggests investors are reasonably cautious.

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