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Motilal Oswal maintains a sell on Tata Power

Motilal Oswal | 31 Aug, 2017  | Follow Author | Add to my Favourites 
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Optimized CGPL’s capital structure

Post analyzing Tata Power’s (TPWR) FY17 annual report, we have raised our estimates. Key highlights:

CGPL gets INR45b quasi equity; another INR29b needed over three years

- CGPL’s (Coastal Gujarat Power, Mundra) EBITDA declined 58% YoY to INR5.4b in FY17, as fuel under-recoveries nearly doubled to INR0.58/kwh (INR15b). Finance cost declined 48% YoY to INR6.8b on conversion of INR45b in quasi equity. FCF generation improved due to a sharp increase in trade payables to 145 days, historical low capex of INR467m, and lower interest payments.

- We are raising estimates for CGPL, given higher fuel price increase by CERC (v/s our estimate) for escalable portion of fuel cost, lower PLF and a stronger INR.

- CGPL will require INR29b equity infusion or re-financing to meet INR20b debt repayments and fund negative free cash flows over FY18-20E.

Coal JVs are funding negative free cash flows (some of under-recoveries) at CGPL

- Coal JVs’ disclosure has improved. PAT grew ~5x YoY to INR6.7b and dividend payout was ~56% in FY17. INR3.7b dividend from coal JVs nearly offset the INR3.3b negative free cash flow (FCF) at CGPL. Coal prices are expected to drive ~40% PAT growth in FY18. We expect 100% payout by coal JVs w.e.f. FY18.

Delhi distribution: Strong FCF on WC release, but regulated equity is muted

- Delhi distribution is generating strong FCF on working capital release and a recovery of regulatory assets, but regulated equity growth is muted.

- Despite capex of ~INR8b in the last two years, Delhi’s reported regulated equity is broadly unchanged at INR11.6b in FY17.

Renewable energy: Strong free cash flow, but intense competition hurts growth

- Capacity increased from 294MW in FY16 to 1,459MW (excl. parents’ 500MW), and EBITDA increased from INR2.2b to INR8.6b on M&A in FY17.

- Capacity will increase further by 400MW in FY18E. However, growth will slow to 200MW (400MW earlier) each year due to rising competitive intensity. PAT is expected to increase at a CAGR of ~38% over FY17-20E to INR4.5b.

Leverage increased under Ind-AS; Maintain Sell with SOTP of INR71

- Consolidated net debt to EBITDA ratio rose from 5.1x to 6.4x under Ind-AS on exclusion of JVs. We expect leverage to decline due to the lack of valueaccretive re-investment opportunities, as management highlighted pulling back from investment opportunity in RE due to intense competition.

We are raising PAT estimates by 14%/10%/5% for FY18/19/20 on upgrades at CGPL and tax savings. EPS is expected to increase at 14% CAGR to INR7.7 over FY17-20E. Stock is trading at a P/E of 10.8x FY19E.

Net worth has become volatile due to fair value accounting under Ind-AS. It no longer represents the historical meaning of shareholders’ contribution and retained earnings. TTherefore, we abandon P/BV basis for valuations and switch to SOTP-based valuation. Maintain Sell rating with an SOTP of INR71

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About Motilal Oswal

Motilal Oswal was founded in 1987 as a small sub-broking unit, with just two people running the show. Today it has a 2000 member team with a networth of Rs7 bn and market capitalization as of March 31, 2008 at Rs19 bn.


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Disclaimer: The author has taken due care and caution to compile and analyse the data. The opinions expressed above are only the views of the author, and not a recommendation to buy or sell. Neither the author nor accept any liability whatsoever arising from the use of any of the above contents.

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