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Favourable Mundra verdict, Arutmin stake sale key for Tata Power

Low fuel prices and a better performance by its Mumbai operations helped Tata Power Co. Ltd’s earnings in the March quarter. Tracking the 4% drop in stand-alone volume, consolidated revenue fell 7% from a year ago. But operating profit, or earnings before interest, taxes, depreciation and amortization (Ebitda), increased almost 8%. Compared with a loss a year ago, the company posted a profit of Rs.159 crore in the last quarter.
The fall in international coal prices has hurt the coal business, the revenue of which slumped 22%. But the impact was cushioned by better efficiencies and foreign exchange gains on value added tax-related settlement in an overseas mine the company said in a statement. Also, low coal prices reduced the fuel costs of its Mundra ultra mega power plant. Together with the improved performance of its Mumbai operations, this helped Tata Power report a better-than-expected profit.
The performance brought cheer to investors who have been troubled by a series of sluggish quarterly performances. The stock rose 1.8% on Wednesday. Encouragingly the company indicated that it would be able to maintain the efficiencies and operating margin at the coal business if prices remain stable, an analyst with a domestic broking firm said.
If the fuel costs at the Mundra plant remain low and Mumbai operations continue to improve, then it is likely that 2015-16 can turn out to be a better year for Tata Power. It is set to commission 350 mega watt of power plants in the current fiscal year, which could bring in fresh revenue. But that alone may not revive the stock, which is down 14.5% since January 2014.
The Mundra power plant remains a major headwind for the stock. The plant continues to post losses because of cost under-recoveries—their cost of electricity generated at Mundra plant is more than the selling price. It is not yet clear when the verdict on compensatory tariff will come.
To reduce the risk from low coal prices, the company signed an agreement to sell its stake in Arutmin coal mines a year back. But the transaction is not closed yet.
Positive developments on these two events are important as they will not only help Tata Power conserve earnings but will also find resources for new investments, keeping debt in check. Last month, Standard and Poor’s revised the outlook on the company’s credit rating down from positive to stable citing slow progress on tariff revision for Mundra power plant and delay in completion of Arutmin stake sale.

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