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High coal prices and strong performance at subsidiaries, barring the Mundra ultra-mega power project in Gujarat, boosted Tata Power Co. Ltd’s earnings in the June quarter (first quarter, or Q1). Net profit more than doubled from the year-ago quarter.
As high coal rates pushed up realizations in the coal business, the coal ventures’ contribution to the company’s earnings increased manifold. Add to this the new renewable energy capacities and better performance by the stand-alone entity and operating earnings, excluding the Mundra plant, rose significantly from a year ago.
But as has been the case, the Mundra power plant negated a significant part of the earnings. From Rs383 crore a year ago, losses at the plant expanded to Rs431 crore as fuel costs pushed up operating expenses.
From 30 paise per unit a year ago, revenue under-recovery increased to 93 paise per unit last quarter. According to Tata Power, apart from higher fuel costs, the Mundra plant’s performance was impacted by the delay in tariff notification, which will come in subsequent quarters.
As these tariff notifications come through, cost recovery at the Mundra plant should improve. But that alone will not completely end the losses at the plant, which will remain a major earnings headwind for Tata Power.
As Rupesh Sankhe, an analyst at Reliance Securities Ltd, explains, even if Tata Power maintains the current quarterly earnings run-rate for the full year at the consolidated level, about 60% of its operating earnings (earning before interest, tax, depreciation and amortization) will be eroded by the finance costs, assuming 8% interest rate on total debt, which has increased post the solar assets acquisition. This leaves little money for future investments and shareholders.
The management is mindful of the problem and is pursuing corrective steps. According to Sankhe, the management is clear it cannot run the Mundra plant with losses for a long time. The company is said to be in talks with the regulator for a possible solution. But given the complex nature of the problem, a solution will not be easy to come by.
In the meantime, the scenario can be improved by the sale of non-core assets. But even that seems to be taking time and the Tata Power management has nothing concrete to share on this, which clouds the earnings outlook.
“Unless and until we get clarification on Mundra plant, we do not see scope for significant earnings upgrade,” adds Sankhe of Reliance Securities .
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