Tata Power: Hold

The stock of Tata Power, which, among its other operations, distributes power in Delhi, came under pressure in the run-up to the recent Delhi assembly elections and thereafter.

The expected victory followed by the landslide win of the Aam Aadmi Party, which has been in favour of slashing power tariffs and instituting probes against power distribution companies in Delhi, spooked investors. During its earlier brief stint in power, the party had ordered an audit of power companies’ accounts by the CAG, the government auditor.

But the stock has recovered somewhat since the election results — perhaps indicating that the concerns may be overdone. While the uncertainty over the CAG audit could remain an overhang on the stock until the final outcome, long-term investors can hold on to the stock.

One, at ₹84, the stock trades at a reasonable 1.5 times its estimated book value for 2015-16 — at the lower end of its five-year historical valuation band of 1.5-2.5 times. Next, until the CAG audit is completed, it will be business as usual for Tata Power and subsidy, if any, will have to be borne by the Delhi Government.

And if the audit gives the company a clean chit, the overhang will ease.

Finally, a favourable tariff order on Tata Power’s loss-making 4,000 MW Mundra ultra mega power project (UMPP), which accounts for nearly half the company’s capacity, would be a big positive. Besides, Tata Power selling stakes in some of its coal mining companies in Indonesia can help it pare debt.

Awaiting verdict The Mundra UMPP that runs on imported coal turned unviable after a change in Indonesian laws raised the price of coal exports from the country. With only a partial recovery of costs allowed, the plant has been incurring losses. The Mundra plant reported net loss of ₹822 crore for the nine months ended December 2014 — lower than the ₹1,164 loss suffered in the year-ago period, aided by lower global coal prices.

A favourable tariff order can come as a big boost for Tata Power. The matter is pending with the Supreme Court, which last year stayed the Appellate Tribunal order allowing Tata Power higher tariffs.

For the nine months ended December 2014, Tata Power reported consolidated profit of ₹9 crore as against loss of ₹115 crore in the year-ago period.

Muted performance

But the improvement was driven by higher other income. The company’s overall operational performance has been muted due to lower power generation, fall in realisations and volumes in the coal business, and higher expenses. But most of these negatives appear to be priced into the stock, which has given up much of the gains made early last year.

The company’s consolidated debt-to-equity ratio has come down from 3.3 times as on March 2014 to 2.8 times as on September 2014. In April 2014, Tata Power had raised ₹1,993 crore through a rights issue.

The company selling off stakes in some of its Indonesian coal mines will further help reduce some of its debt burden.

COMMENT NOW