Tata Power: All eyes on verdict in Mundra case

Despite poor June quarter results, analysts positive on expectations of favourable judgment by SC

Adoption of new accounting norms, Ind-AS, was expected to be detrimental for power companies. But after a noteworthy show in March quarter, consolidated revenue of Tata Power not only declined five per cent to ~6,838 crore, it missed Bloomberg consensus estimate of ~9,273 crore by a huge margin in the June quarter (Q1). Net profit plunged 76 per cent year-onyear to ~73 crore in Q1. As a result, Tata Power's stock price declined over three per cent in Tuesday's trade and analysts were bracing up for further pressure. However, it gained over two per cent on Wednesday, on positive outlook and the fact that a big part of the profit miss was due to one-off or exceptional items.

Thus, led by expectations of a favourable long-pending verdict on its Mundra plant, analysts have retained their bullish view on Tata Power.

Earnings of Mundra plant, which has a power generation capacity of 4,000 megawatts, have remained weak for many years due to the ongoing litigation. Tata Power is confident of a positive verdict on September 14. Analysts at ICICI Securities say the issue has reached its last leg as Appellate Tribunal for Electricity (Aptel)’s judgment is now pending before Supreme Court. The Street is factoring in significant gains after the verdict. A disappointment will be painful.

For now, Q1 results were largely dented by one-off expenses attributable to impact of regulatory orders, low plant availability factor (PAF) in Mundra, and annual dredging charges in Q1, all of which affected net profit by ~185 crore. Among them, the under-recoveries due to low PAF in Mundra plant assumes importance, given that PAF for the quarter was at 63 per cent (due to maintenance shutdown), way below the normal PAF of 80 per cent. As a result, fixed costs amounting to ~90 crore remained unabsorbed and loss incurred by the unit expanded from ~150 crore a year ago to ~390 crore in Q1. The bigger jolt was due to mark-to-market (MTM) adjustment of ~130 crore towards foreign-exchange options and derivatives. Before adopting Ind-AS, Tata Power recognised MTM losses as contingent liability, which had no bearing on net profit. For FY17, the exact pain from Ind-AS remains unclear. The management is likely to meet analysts before September quarter results to explain the same.

A few revenue-generating entities such as Tata Power Links and Industrial Energy Limited (mainly catering to Tata Steel) have been kept out of consolidated accounts due to adoption of new accounting standards. As a result, analysts have restated their estimates. For instance, those at Kotak Institutional Equities have reduced FY17 earnings target by 26 per cent.