Tata Power in transitory phase as non-operating income boosts profitability

Business for private power producer Tata Power is in its transitory phase with the company juggling among a loss-making Mundra power unit, debt reduction and growing its relatively new renewables segment. Amid this, its non-operating income is boosting profitability by contributing more than half to it. 

Analysts are hopeful that the sale of investment will help the company reduce debt while renewables are emerging as the main operating profit growth driver. 

Data from Tata Power’s consolidated financial results for the last financial year shows that other income and exceptional gains combined contributed about 52 per cent to the company’s profit before tax (PBT). This percentage is higher at 85 per cent in the June 2018 quarter. The company reported a PBT of Rs 29.15 billion in FY2017-18, almost double that of Rs 14.47 billion reported in FY16-17. 

An email query sent to Tata Power on Friday remained unanswered. Data, however, reveals that Tata Power’s exceptional gains in the last financial year are largely driven by a reversal of impairment taken for its Mundra plant. For the June quarter, the company said exceptional gain was due to sale of its stake in Tata Communications and Panatone Finvest.

“We look at these more as a step towards reducing debt. Additionally, as the proceeds come, it is also showing up at the profit level,” said an analyst, who tracks the company, on the condition of anonymity.

There are signs of improvement on the leverage side. Tata Power’s net debt to equity ratio improved to 2.26 in the June quarter against 3.10 seen in the same period a year back. As of June 2018, the company’s total consolidated debt was Rs 473.7 billion.

One could expect a higher one-time gain in the next few quarters as well. Tata Power, for instance, is yet to complete the sale of its strategic engineering division to Tata Advance Systems, a wholly-owned subsidiary of Tata Sons. 

The deal was valued at Rs 22.30 billion out of which Rs 10.40 billion is payable at the time of closing and Rs 11.90 billion payable on achieving certain milestones. More than a year back, when Tata Power started its non-core divestment spree, sale of investment was expected to be at Rs 50 billion. Analysts expect the total proceeds to trickle in by the next one to two years.

Tata Power is looking at reducing its overall debt by divesting non-core assets worth about Rs 50 billion. The company declared the sale of these investments during FY18 and received Rs 25 billion in the June quarter, according to an India Ratings report dated July 17. 

The company is also seeing one-time gains arising out of divestment from its coal assets. “Tata Power received $110 million during FY2018 by sale of its stake in the Artumin mine for a consideration of $400 million. The company is looking at receiving the balance payment of $290 million in the near term. The proceeds would be used for further deleveraging,” the India Rating report added. 

Alongside, Tata Power is also building its renewable portfolio. The company expects renewables to be its primary growth driver in operating profit. “We eventually expect the renewable business to contribute more to the company’s profitability than the conventional business,” said a second analyst tracking the company, who did not wish to be identified. After Tata Power’s Welspun acquisition, its name was changed to Walwhan Renewable Energy. 

Walwhan’s profit after tax (PAT) in the June 2018 quarter grew to Rs 1.01 billion from Rs 600 million in the same quarter a year back. PAT for Tata Power Renewable Energy also rose to Rs 710 million from Rs 560 million in the same period a year ago. The two firms together contributed more than 27 per cent to the company’s consolidated Ebitda of Rs 19.83 billion in the June quarter, according to the company’s results presentation.

According to its annual report, Tata Power had an operational generation capacity of 10,757 MW as of March 31, 2018. Of this, 32 per cent of its capacity is in clean and renewables generation sources (hydro, wind, solar and waste heat recovery), while the target is to maintain 40-50 per cent of its total generation capacity from non-fossil fuel-based generation sources by 2025.