Debt reduction plan on track – Praveer Sinha, Tata Power

Update on the Indian Equity Market:

After a small jump yesterday, NIFTY continued the declining trend on Wednesday by closing 0.4% lower at 11,254. In addition to the global markets’ anxiety, fresh coronavirus cases reported in India led to the selling pressure.  Leading the losses were YESBANK (-6.1%), EICHERMOT (-4.0%) and BAJFINANCE (-3.9%). CIPLA (+4.8%), DRREDDY (+4.1%) and SUNPHARMA (+2.8%) were among the top gainers. Among sectors, NIFTY MEDIA (-2.0%), NIFTY BANK (-1.7%), NIFTY PVT BANK (-1.7%) were the worst hit. NIFTY PHARMA (+2.0%) and NIFTY IT (+1.0%) were the only sectors to close on a positive note.

Debt reduction plan on track – Praveer Sinha, Tata Power

Excerpts from an interview of Mr. Praveer Sinha, Managing Director, and Chief Executive Officer, Tata Power published in Mint dated 4^th March 2020

• India is very dependent on China and Taiwan for sourcing solar panels. India imports 90% of its solar panels from China.  As a result, the renewable energy business in India is getting impacted by the Covid-19 outbreak. Many projects are getting delayed and the delay will last for another 2-3 months.
• On supply of power to states, Tata Power has been waiting for more than a year for the states to resolve the issues related to tariff hike.  Tata Power will be constrained to close the units around 10^th March 2020, if the issues are not resolved quickly. The issues mainly pertain to 5 states- Gujarat, Maharashtra, Punjab, Rajasthan and Haryana.
• Out of the 5 states, Gujarat is ready to revise the power purchase agreement (PPA) with Tata Power. Maharashtra also seems to have moved forward and the new government is making a decision. Punjab, Haryana, and Rajasthan are yet to take any decision and this is where the delay in signing a revised PPA is coming in.
• Tata Power has an accumulated loss of Rs 110 bn as of December 2019. Loses have come down drastically due to lower coal prices and better sourcing of coal as well as better blending. But the issues still need to be resolved in order to have continued supply from the Mundra plant, which is one of the lowest cost plants even with revised tariff.
• Tata Power has concluded a deal for the synergy plant in South Africa and money will come in by March 2020. Management expects discussions for Zambia plant and shipping business to both conclude by 2QFY21E. Management also expects to divest Baramulti Suksessarana Tbk (BSSR) and Antang Gunung Meratus (AGM) by 3QFY21E. In the last 1 year, Tata Power also has been able to get more than $ 100 mn from Arutmin. Everything is on track in terms of the debt reduction plan. It is just a question of getting the right buyer and the right price. Considering all these plans, management expects Rs 60 bn of debt reduction by end of FY21E.
• Tata Power does incremental capex for their regulated business such as transmission and distribution in Mumbai or Delhi distribution as well as some capex in generation business, especially Flue-gas desulphurization (FGD). These generate RoE of 15.5%. This capex has been helping Tata Power in improving EBITDA. Since last year, the average EBITDA has increased in the range of 22-24%. Whatever Investments the company is doing is generating good cash which is useful for growth.
• Tata Power is also looking at monetizing some other businesses. They have great opportunities especially in renewables where they can leverage the growth they have. Tata Power already has 2,700 MW of operating renewable assets and another 700 MW is getting commissioned.
• There is no impact on the shipping of coal. The shipping to China has actually increased as their coal mines are not operating. Tata Power is also getting all their coal shipments as they have firm contracts with all coal companies and shipping companies.

Consensus Estimate: (Source: market screener website)

• The closing price of Tata Power Company was ₹ 44.4/- as of 04-March-2020.  It traded at 10.8x/8.2x/ 7.3x the consensus earnings estimate of ₹ 4.1 / 5.4 / 6.1 for FY20E/ FY21E/ FY22E respectively.
• The consensus target price for Tata Power Company is ₹ 72.3/- which implies a PE multiple of 11.9x on FY22E EPS of ₹ 6.1/-.