The Tata Power Company Limited (500400) Earnings Call Transcript & Summary

Good evening, everyone, and welcome to the earnings call of Tata Power for Quarter 2 FY '21. With me on the call is my colleague, CFO, Ramesh Subramanyam; Financial Controller, Anand Agarwal and the Chief of Investor Relations; Mr. Soundararajan Kasturi. Quarter 2 has been an eventful quarter for Tata Power with a robust operational performance across all businesses and significant deleveraging through a number of measures that we had laid out in our long-term strategy. Despite COVID-19, the company has achieved very good progress in this quarter. We have seen a sharp recovery in demand with sales in our distribution circles picking up almost 35% compared to quarter 1, though it's a little below than the previous year. Collections in the distribution business has improved, though it was severely impacted in the quarter 1. And we expect that it will become much better going forward. Our overdues from state discoms have also come down in the last 2 quarters. All our thermal assets have run on higher availability. CGPL under recovery reduced sharply with the falling coal prices, better coal sourcing and logistic management. The fuel FOB under recovery has reduced from INR 0.52 in quarter 2 FY '20 to INR 0.46 in quarter 1 FY '21 to INR 0.30 in this quarter. The fall in FOB prices led to reduced profits in the coal companies. On a combined basis, CGPL and coal-related businesses generated a combined profit of INR 39 crores without one-offs. We now have 2 back-to-back quarters of profit in this cluster. With the planned debt reduction in CGPL and the merger with Tata Power, CGPL issues are now fully contained, and it is likely to become self-sustainable in the future. We continue to improve availability across the renewable assets with the company taking over the operational control of certain wind sites and certain preemptive maintenance activities carried out through RCM. However, in the last 2 quarters, we saw very good -- very low wind speeds across India due to weather patterns, which led to significant reduction in generation. The pickup in the economic activities as lockdown restrictions have been relaxed have helped in our EPC businesses returning to normalcy. Tata Power Solar's total revenue jumped from INR 405 crores in quarter 1 to INR 1,014 crores in quarter 2. Solar EPC business continues its rapid growth with orders received in Q2 of INR 1,556 crores for 347-megawatt of solar projects, taking the total order book to almost INR 8,687 crores as of end September, with nearly 2.2 gigawatts of large projects in pipeline. The delays in project execution during the last quarter will be made good in subsequent quarters as we are seeing increased site activities. The current order book is likely to be executed over the next 12 to 18 months. Similarly, Tata Projects turned to profit of INR 41 crores in this quarter compared to a loss of INR 35 crores in the last quarter. With all these improvements, we have clocked a 10% growth in reported PAT to INR 371 crores compared to reported PAT of INR 339 crores last year. The company has now reported an increase in profit on a year-on-year basis for the last 4 quarters and this is the second consecutive quarter of PAT increase of 10%. The consolidated revenue stood at INR 8,413 crores compared to INR 7,329 crores in the previous year, mainly driven by higher generation in conventional assets, TPCODL acquisition and solar EPC business, which, of course, has been partially offset by lower wind generation. The consolidated EBITDA in this quarter was INR 2,276 crores, up by 7% compared to last year, mainly driven by lower under recovery in CGPL and higher solar EPC business, offset by lower wind generation. The lower coal prices affected the profit of coal JVs in this quarter, but due to improved business in Tata Projects and Prayagraj, the underlying business EBITDA is 7% higher at INR 2,472 crores this quarter. During this quarter, the company won bids of 347-megawatt of solar projects. With this, the company's renewable project development pipeline moves to 1,237 megawatts. With further 370-megawatt of solar projects awaiting letter of award, the total renewable portfolio of the company will grow to 4.4-gigawatt when all these projects get implemented. Moving on to the balance sheet and the progress on deleveraging. We have seen a meaningful reduction in the debt with the receipt of balance ship sale consideration and completion of preferential equity issuance. This helped us to reduce the net debt from INR 43,578 crores as on 31st March to INR 36,840 crores by the end of this quarter. Our debt-to-equity ratio has sharply reduced to 1.52 from 1.81x in previous quarter. Similarly, debt to underlying EBITDA has improved to 4.01x by end of September. This significant improvement in debt metrics achieved over last few quarters has helped the company to secure an upgrade in its credit rating from CRISIL upgrading the long-term rating to AA stable and ICRA changing the outlook to positive on its rating of AA negative. The improving credit trading and the reduction of debt will assist the company in reducing the interest cost and optimizing its finance cost. We are also happy to inform the completion of the defense sale transaction at INR 1,076 crores, and Tata Power has received cash of INR 539 crores, net of the debt of SED. Besides reducing the debt of the company, this sale also addresses many investors' concerns on Tata Power's indirect involvement in defense-related business, and therefore, we expect positive impact on Tata Power's overall ESG ratings. Work on setting up of an InvIT for a renewable asset has progressed very well with the nonbinding term sheet now signed and due diligence underway. The progress has been as per the plan. And we are expecting to complete the restructuring in the next 2, 3 months. We'll share the terms once the binding agreements are in place. The various pieces of our strategy to strengthen the balance sheet is shaping up as planned and we are very confident of achieving the INR 25,000 crores net debt target at the end of this financial year. While we work on reduction of debt through divestment and restructuring, the focus on generating strong cash flows and recalibrating CapEx in line with the cash position will help us to achieve sustainable ratios. Our discussions on the revised GRC framework for compensatory tariff for Mundra is continuing. However, with the significant fall in coal prices, which have resulted in CGPL and coal businesses reporting profit, CGPL is likely to become sustainable on its own cash flow. We foresee coal prices to remain low in the future, which will make the compensatory tariff maybe less relevant in overall context. In the recent businesses taken over, both Prayagraj and CESU had good quarters. In fact, in Prayagraj, we continued to see very strong operational performance, achieving a 76% availability in this quarter. PPGCL also recovered significant part of its receivables under the COVID-19 package of Ministry of Power, Government of India, which was received by the state. Along with the share of PPGCL's profit, Tata Power is also providing O&M services, which is paid separately. We have now completed a full quarter since taking over CESU through TPCODL. And we have seen significant improvements in the operational and financial parameters. Despite COVID-19-related challenges, we have achieved the parameters that we originally planned. We have been able to reduce the provisional billing by almost half and improve our collection efficiencies from around 85% in June to almost 99% in the last quarter. We are confident of the turnaround of this business as per our plan in the next 12 to 15 months. The growth in our consumer-oriented businesses continues to be promising, and we continue to build partnerships for the future. For EV charging, the geographical presence of our EV charging network has been enhanced from 19 to 23 cities, and 203 public charging points have been installed. Tata Motors has recently issued a letter of intent to Tata Power for development of EV charging ecosystem required for deployment of 300 eBuses in Mumbai. We have also entered into agreement with MG Motor for setting up public charging infrastructure at their dealer places. Similar agreement has also been signed with JLR. Similarly, we have received LoA for almost 5,000 solar pumps during the quarter. And we have also been awarded a 6.2-megawatt order for the largest carport from Tata Motors. Our rooftop business presence has now expanded to more than 100 cities. And we have 27% market share as per the latest Mercom report. Our microgrid installations continue to rise with a pipeline of more than 130 installations. And we have been able to reach to nearly 800 customers across 190 villages as of end September. Agreements have been signed with partners to provide efficient electrical appliances. And also along with Grassroot Energy to explore electricity generation through biomass and biogas technologies. We continue -- the company continues to make considerable progress towards its long-term strategy, and appropriate actions have been set in motion to address challenges of individual businesses, so that the company can deliver an overall value to its shareholders and investors. We are excited about this journey. And are grateful for the support and patience shown by all of you in this journey. I now hand over the call to Raymond for question and answers.

[Operator Instructions] The first question is from the line of Mohit Kumar from DAM Capital.

Congratulations on a good set of numbers. Sir, my first question is, sir, I do understand that you'll not be able to share the valuation of InvIT. But sir, can you give broad understanding of the time line? And are we confident that we'll be able to close the deal by March '21, including the entire transfer of the asset for InvIT?

Yes. I think by -- before the end of the year, definitely, we are confident it will be -- it will get done. In fact, we are trying earlier. But definitely before the financial year ends, we'll be completing this.

What was the binding term sheet? And any kind of idea on the leverage you're expecting in the InvIT?

Well, as you know, the unlisted InvITs don't have any particular leverage. This will go by finally what the rating agencies and banks agree upon, finally, when they give out the ratings. And normally, one has to form the InvIT to get the final rating and the sanction. So therefore, you can be -- I think a rough ballpark is that traditional debt/equity ratios cannot be applied to an InvIT situation, they are lower. Now how much lower would finally depend on what the rating agencies and the banks agree upon to give optimal rating as well as good lending terms. So that's a broad indication we can give you. You know that in the listed InvIT segment, the SEBI's starting debt is 49%. So in unlisted, there is no such limit. So it will be definitely not constrained.

Okay. Sir, secondly, in this quarter, we have seen a sharp turnaround in CESU. And there's some higher profit in this TERPL. Is there some bit of one-off in both the entities?

Sorry, can you repeat -- you talked about CESU?

CESU, and TERPL, the shipping company.

Oh, sorry, shipping company?

Shipping company and CESU. Both the Q-o-Q and Y-o-Y is now -- Q-o-Q numbers are slightly off. So I'm trying to figure out is there something one-off there.

So shipping company is only because of the tariff because it is also linked to the CRC's escalation indices. So when the indices are favorable, they make higher profits. When they eventually catch up, they match the market rates. So it's what you call, the corollary is that when the shipping company charges higher, the CGPL pays them higher freight. So for us, in a consolidated manner, it doesn't matter because the earnings of the shipping company is the cost of CGPL, right? So individually, it doesn't matter. But to your question that why is it different? That's because it is influenced by the CRC indices. And your other question was on CESU?

CESU, yes.

So CESU...

Q-o-Q, there is sharp improvement, yes.

Yes. So one, that is more because of the application of the relevant accounting standard in such acquisitions, where the accounting standards require you to follow a certain process and -- which has been adopted here. So last quarter, it was not adopted. So as a result, the last quarter's reported loss was reversed in this quarter. As a result, you are seeing that increase. But actually, this doesn't belong to this quarter.

What would be adjusted number, if I may ask?

Adjusted number would be INR 2 crores.

The next question is from the line of Murtuza Arsiwalla from Kotak Securities.

Two questions from my side. One on the consol -- on the balance sheet. We see the capital work-in-progress increasing. Would that be largely attributable to renewable assets? Or if you could give some color in the last 6 months? And second is, while I understand that the lower under recovery mix would be less dependent on the compensatory tariff, could you give some color on where the compensatory tariff is sort of progressing? Because anything [ strong on it ] is still a risk mitigating sort of measure. So where are we in terms of signing the compensatory tariffs?

So to your first question, the answer -- Murtuza, right? So the first question is that the -- no, you asked first about...

The capital work-in-progress...

That is largely renewable. Okay. And some -- we have some transmission projects in the regulated businesses, which is going on. So both are the ones. And they are likely to get converted in the next 12 months -- before next 12 months. So that was one. The second is on the compensatory tariff, where are we? So as Mr. Sinha outlined in his initial remarks, we are -- while we are in discussions with the government, clearly that progress has to be made. There are differences in the initial conditions and subsequent conditions that have been put, so we are in discussions with them. But I think we are coming more and more to a conclusion that if the long-term outlook on coal is not likely to firm up very soon, so really speaking, for us, this is becoming less and less relevant. And what we have done is, keeping that in view, we've actually kind of already sized the debt down. And by the end of the year or, let's say, in the coming months, we might see CGPL debt go down to as low as INR 4,000 crores, which will mean that it will become self-sustaining in any case. And as you know, there is a hedge which operates. As a result of which, if the coal prices were to go up, anyhow we do have a hedge in the coal companies. So our overall plan has been always agnostic of any solution that is coming out of compensatory tariff.

The next question is from the line of Puneet Gulati from HSBC.

Sir, just continuing on this call... [Technical Difficulty]

Sorry, we are not able to hear.

Mr. Puneet Gulati, we can't hear you.

Hello, can you hear me?

Yes, sir, we can hear you now. Please go ahead.

So on the compensatory tariff, is it fair to assume that you are not pursuing the issue with as much vigor as you would have been earlier?

I think you are putting words. We are -- our view is that if they come on our terms, it could have been a different issue. But right now, there is no such traction. So also for us, see, we can't be running the business on the -- on certain things just going our way. So we are planning completely to make this business run on its own. And that's the step -- those are the steps we're already taking.

Okay. Great. My second question is, in your stand-alone balance sheet, there is a INR 17,300 crores of debt, which has significantly come down. Out of this, how much would relate to the regulated business?

So about INR 6,000 crores.

Okay. INR 6,000 crores would be regulated and the balance INR 11,000-odd crores is unregulated, is it for the other investments?

Yes, all the other investments. And the rest of the noncore asset sale, plus the dilution in the renewables business, all this will cut it down to a much, much lower level, which is reflecting more closer to finally something about the regulated debt, which would be there.

Okay. Okay. Great. And on the SED sale, will there be any capital gains tax implication?

No.

And to what extent?

No.

The next question is from the line of Swarnim Maheshwari from Edelweiss.

Congratulations for a good set of numbers. Sir, 3 questions. Firstly, I mean, you did mention that you guys are expecting the lower -- the coal prices to be on the -- at the lower side on -- for the future reference. Now my first question is with respect to that. Do you think that it then really makes sense to look at the coal mines because for CGPL coal can be really outsourced from somewhere else also. So is there any thought process that we will be actually looking to sell our coal mines also at some point in time?

So right now, our first focus is to get the license renewal in KPC, as you know. The good news is that in Arutmin, which was the other mine which we sold, and we have not closed the transaction because we have not got the full money, there, the license extension has come through. So once the license extension comes through, we will have to look at all these options. And at the end of the day, everything will depend at what value and what is the response we get.

Okay. All right. Sir, secondly, on the divestment side, now we have actually realized a fair bit of divestment proceeds from our noncore investments. If you can just actually share what is now pending to be realized in Q3 and Q4 from the noncore divestments?

So right now, we are pursuing in our list of assets, the Georgia investment and the -- which is a hydro investment and the Zambian hydro investment. And lastly, defined as noncore, we have Tata Projects. So -- and there is a smaller coal mine, which is BSSR. So all these 4 assets are there, which in the coming quarters and months, we will continue to pursue. That's pretty much where we are.

This sale of the proceeds from the defense business, this has been realized in Q3. So the impact on the balance sheet, that will be reflected in Q3?

While we are trying everything, I must say that because of COVID and because of the sentiments in the market on the assets, which we are out in the market, both in Africa as well as in Indonesia, I don't think that we can expect a closure in Q3. But certainly, we are trying to do it in the quarters thereafter. Because the process is on, by the way. We are not letting up the process, but the traction is something which we have to keep a close watch on. But we are confident of getting it through sooner than later. But I must tell you, in addition, that our target for net debt, we will meet, nevertheless, even if we are delayed on these. Because these are not really high ticket items. These are not going to move the needle. Our broader target of going under INR 25,000 crores is on track.

Right, right, right. And sir, did we receive anything from Arutmin this quarter?

Yes, we did. I'll give you that number separately while we discuss...

And maybe if you can also give the pending amount. The last time...

Swarnim, INR 33 crores. So this is about $6 million or $5 million.

Okay. $6 million. So the pending amount from Arutmin now would be about $160 million?

Yes. Correct.

Okay. And sir, finally, one last question. What will be the captive order book in our solar EPC, would it be about 50-odd percent?

So about half is captive.

The next question is from the line of Anupam Goswami from B&K Securities.

Sir, my first question on the stake sale of renewables to the InvIT platform. From a point of -- consideration point of view, how much premium also can we look at? And the next question is on, sir, is the -- as you said, the coal prices you foresee a subdued prices. On a net to net effect, taking CGPL as well as the coal SPV, where do we see our profit in those 2 segments going forward?

Okay. To your first question on the premium on the sale of renewable assets, I'm afraid we can't share with you right now because the transaction is still in process. So as and when the final value will be available, we will be informing formally. But you know the market, so you are in a good position to assess that. But -- and your other question on net-net on CGPL and coal. So once we complete our debt restructuring of CGPL, then we expect that together, these 2 assets would be a slight positive. And they will continue to be so regardless of the coal price because one or the other will take the benefit of the movement in coal prices. That is the whole objective of ensuring that we don't put any more equity or support into the combined assets.

Okay. Sir, just to -- as you mentioned that consideration on transaction taking place and you can't discuss. Just what is the benchmark that is being decided on taking on a premium on this? What kind of parameters that are looked at?

So Anupam, I think you are in this business, you know the standard parameters are in these kind of businesses is an EV-to-EBITDA or price-to-book, or DCF or a combination of all these things. This is the standard valuation, and we follow the same methodology or even the investors follow the same methodology. So the only limited point is we can't guide you with the number because we are in transaction mode, so we can't disclose that number. But you can see the latest deals that are happening in the market, and I'm sure that you'll be able to get to a ballpark.

Right. And I'm getting that. And sir, last question on when can we expect the restructuring has been -- the merger of CGPL to the stand-alone as well as Tata Power Solar?

So both these are -- now the merger proposals are in NCLT, and hearings have begun. And we expect -- of course, it's difficult to say that on behalf of NCLT, but I think the next 3 to 6 months should be a reasonable time period by which it seems to be over because in between we do have processes of creditors' meeting or shareholders' meeting, et cetera. So that process has to be followed there. We do expect to get it done before the year-end.

The next question is from the line of Aniket Mittal from Motilal Oswal.

Sir, firstly, I think we won certain projects on the renewable front itself. So just trying to understand what would be the overall CapEx that we're expecting for FY '21 and for FY '22, particularly on to renewables front?

So we have currently about 650 megawatts of assets under construction. And typically, that would be about close to INR 3,000 crores to INR 3,500 crores. We will be spending probably more than half of it or a majority of that CapEx will be over in this year. Some spillover, depending on the progress, will be there in the next year.

Okay. And how much of that do we expect to commission this year?

So commissioning this year, we're targeting 650 megawatts, but maybe it will get spillover to next quarter, that will -- because of COVID, lot of delay has happened in the first half. So we are catching up.

Sir, you also have other project sites that are lined up, this is work would have started, but still have -- so what -- the overall refinancing is higher than 650 megawatt, right?

The 650 is our own development. That is under construction.

Okay. Understood. And just from an overall perspective, let's say, INR 3,000 crores to INR 3,500 crores on the renewable front, how much on your regulated businesses can we expect the CapEx to be? Because I think there are certain FGD plans that we had for Maithon from our [indiscernible].

Yes. So I would tell you the number. The total CapEx that we expect in this year, FY '21, is going to be about INR 3,800 crores, which -- half of them would be renewable, and the rest would be amongst various regulated businesses. And there will be some for the new businesses, which is essentially EV and some would go into some of the nonregulated businesses. But largely, about 85% to 86% of this is going to regulated and fixed tariff businesses.

Sure, sir. And also from the solar manufacturing front, we've seen a decent uptick in the execution during this quarter. What sort of execution can we expect, let's say, over the next 12 months or so? We do have a healthy order book. So I'm just trying to understand in terms of, let's say, revenues. Is everything normalized? I mean what sort of execution do we see over there?

I think the current order book, as you now, is 2.2 gigawatts, right? That is the order book.

Right.

About INR 9,000 crores is the order book. Now the whole issue is that since the activity level has just picked up, we would assume that about half of that will be probably next year. And most of it would be -- the rest will be covered in this year.

Okay. Okay. Sure. One question on the shipping business itself. Now I was actually wondering, given that we've actually sold those 3 ships, our EBITDA and PAT number ideally would have been impacted because the revenue and the EBITDA from that would not have come in our financials is what I was expecting. But still, the overall number seems to be pretty high. So I'm just trying to understand what's happened over there on the shipping business front?

So first is that we have sold the ships, but we do have the contract, okay? So the business operation continues. The only thing is, we don't own the ship, but we have the contract. Second is high number, which we're seeing is mostly to do with the tariff linkage to the CRC index on the fuel price. So those are -- and the last revision of the index was high, so the revenue booked there was high. But consequently, CGPL pays it -- pays also a higher amount, right? So while on a consolidated basis, it is zero-sum game. But individually, the shipping companies would seem to have made a higher profit in this quarter. But this will subsequently get -- there will be a catch-up because it's a time lag between the actual shipping prices and the final notification of CRC.

Sir, just -- sir, you said that you kind of don't own the ships but still have the contracts. So the revenue and EBITDA from this is still flowing in, is what you're saying? And this would then sustain?

Yes, yes, yes. Absolutely right. A certain minimum level of EBITDA will sustain, not as high as this because this is more due to a carryforward of the index effect. While the index has normalized, we will be having a slightly lower number. But yes, there will be EBITDA.

Okay. And sir, special funds, you mentioned that we've done an adjusted PAT of around INR 2 crores. So I'm just trying to understand what is the overall T&D loss over there in shipping.

Overall...

The overall AT&C loss or the T&D loss, if you can just -- if you're okay with that.

Just 1 minute, I'll just tell you. So it is 28.1%.

28%?

Yes, 28%.

And we have brought it down from 40%.

Okay. And sir, what would be the AT&C overall? And it would still be -- it will be around 30% or so.

No, no. This 28% is the exit quarter-end AT&C.

Okay.

Okay. As of October. Now as per the tariff, which has been fixed in 3 years' time, we have to reach 23.7%. Okay? That's where we are heading.

Okay. And lastly, our trajectory in terms of the reduction of AT&C loss would be similar to that has been sort of the normative T&D that has been fixed on the tariff? Is that fair to assume?

So the correct statement to make is the trajectory is in line with what was, let's say, targeted in the bid. Because the -- if it is higher, then you will see losses in the results. As long as we are seeing positive, that means we are on track.

Sure. So I mean, with an AT&C loss of 28%, we are -- okay, coming with a positive number, that means, okay, largely, it's close to the normative number?

Yes.

Okay. And sir, maybe in your PPTs, you've mentioned sort of a broad sort of outline in terms of the consumer-facing businesses that you're highlighting. Sir, could you give certain insights into what sort of revenue or profitability can we expect from some of these businesses, particularly in the solar pumps front or on the EV charging front, let's say, a 2-year perspective?

We don't give too many forward-looking statements. I think we had shared with you all the FY '25 target on all these businesses. So we are tracking them on a 6-monthly basis because... [Technical Difficulty]

Members of the management, we can't hear you. [Operator Instructions] Thank you for patiently holding your lines. We have the line for the management reconnected. Over to you, sir.

Yes. I think the question was around how are we doing on the new businesses of rooftops and pumps, et cetera, I must say that this, of course, quarter as well as 6 months have been seriously affected by the COVID-related issues, but otherwise, we believe the second half will be far better. And we will be able to pick up pace. But we are working seriously now on all the marketing and distribution and launching initiatives. So you will see the results in the next 4, 5 months. Hopefully, year-end would be, we'll be able to make good progress on that. But on the ground, things are working as per the plan.

The next question is from the line of Abhishek Puri from Axis Capital.

Congrats for a good set of results. Sir, 2 things. One, in your presentation, you mentioned for Mundra, there is some SCED scheme one-offs. So could you elaborate what is that?

Okay. This is a scheme where dispatches -- okay, this is a central scheme which says that if you are -- if your cost of variable cost of dispatch is lower in a certain order, then you will be asked to dispatch out of turn. And the difference between the -- your dispatch rate and what is available in the market is shared with you. So that is the scheme which the Ministry of Power runs. And therefore, we have -- and it shows actually a sign of competitiveness amongst the merit order dispatch. So that is the income, it depends on what the market opportunities are available. We sometimes make money, sometimes we don't.

So what is the amount paid, one-off amount?

No, I think last year, we had...

A loss...

There was a loss. This year, it is not there.