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

Ladies and gentlemen, good day, and welcome to the Tata Power Q3 FY '23 Earnings Conference Call. [Operator Instructions]. Please note, this conference is being recorded. I now hand the conference over to Dr. Praveer Sinha, CEO and MD, Tata Power, for his opening remarks. Thank you, and over to you, Dr. Sinha.

Thank you, Vikram. Good evening to everyone, and thanks for joining for the call. On behalf of Tata Power and on my personal sense, I would like to wish all of you a very happy healthy and prosperous 2023. I'm joined today on the call by my colleagues, Sanjeev Churiwala, CFO; Mr. JV Patel, Financial Controller; [indiscernible] from Investor Relations; and few other members from my finance team. Two days back, the Honorable Finance Minister presented a very balanced budget, which had a lot of initiatives and programs to push the infrastructure sector. The programs were typically in areas of clean energy, renewable energy, battery storage, pump storage opportunity as also the long-term view as to how we will move towards 2030, 500 gigawatts of renewable capacity. It is heartening to see that the government is also focused on decarbonizing the economy. And I'm sure that all these announcements of the government in the budget, we will be able to move at a very fast pace towards using clean and greener energy in our quest to become net zero. As you may recall, Tata Power is the first power company in the country to announce its vision to become net zero by 2045. And we are working towards that goal. The big picture policy support that we saw in the budget was also about creating the transmission line from Ladakh to bring clean power, solar power from there into the main parts of the country. Also the support through viability gap funding for battery storage of nearly 4,000 megawatt hours will also help in turning up with clean energy and 24-hour clean energy solutions. Let me now start talking about the power demand, which we see in last 1 year has grown tremendously. Even in winter months, we are seeing that the peak demand has been in the range of 200 to 210 gigawatts. And we can expect that this will continue to grow as summer approaches. On overall basis, we find that in the month of January itself, there has been a 12% increase in power consumption. And we do expect that this trend will only increase going forward, considering the summer months as they approach us. Also, in the renewable sector, we have seen in the last few weeks that there has been huge price correction, especially in the prices of polysilicon, vehicles, cells and modules, which will help us to implement many of the projects, which were delayed in last 12 to 18 months because of huge increase in the prices of the solar manufacturing as also in the prices of the various commodities like steel and copper. In the last quarter, we also saw that the Mundra plant could operate at full capacity, supplying to the 3 states of Gujarat, Maharashtra and Rajasthan. And the recent order of CERC has jest up that the tariff for Mundra becomes cost reflected. The Section 11 orders during the period 5th May to 31st December, has helped us to ensure that the supply of power takes place on a cost-effective basis and the full pass-through of full cost is provided. And the benefit of this has been considered in our quarterly performance. Moving to the financials. Tata Power has reported an excellent quarter witnessing strong performance from all the business clusters, including our traditional generation business, transmission business and distribution business. Our PAT has grown consistently for the 13 successive quarters, demonstrating a very strong business fundamentals. Consolidated PAT achieved a new record of INR 1,052 crores, which is up by 91%. We also saw a very robust year-on-year growth of 30% in revenue and also a huge increase in our EBITDA by 53% to a record INR 2,818 crores. Our renewable capacity during this quarter has increased to INR 6,072 crores -- sorry, 6,072 megawatts with an installed capacity of 6,918 megawatts and another 22,154 megawatts under various areas of implementors. During Q3, the renewable company, that is TPREL won 255 hybrid projects from Tata Power Delhi Distribution through a e-auction process. And also, it has won other orders from MSEDCL, which consists of 150 megawatts order worth INR 684 crores. In addition to this, the company has won a large number of EPC orders and has a large order book of nearly 3,914 megawatts, which includes the internal projects also. Our 4 gigawatt cell and module factory construction activity is at full swing, and we expect the module plant will be ready by September and the cell plant will be ready by end of December. And we do expect that the cell -- that the model reduce from here will be used for the various projects, both internal as well as third party that will be implemented by us. The TPREL Rooftop business also has seen very good traction in the quarter and 127 megawatts of capacity was installed in the last quarter. In addition to this, 102 megawatts of new orders have been won during this quarter. The Rooftop business, in fact, has a very healthy order book of 368 megawatts worth INR 1,375 crores. The Rooftop portfolio has now expanded to 1,300 megawatt cumulatively with installation right across the whole country. And with this, we have a footprint in nearly 275 cities in the country. It was a good quarter for solar parts also with Tata Power executing nearly 12,000 pumps in Q3. In the December month only, we executed 6,300 pumps, which is one of the highest for Tata Power till now. We continue to power green mobility in the country and have partnered with Indian Army to set up EV charging points in Delhi cantonment area and are in discussions with many more similar cantonment in other parts of the country. On an overall basis, Tata Power energized 900 public chargers during Q3, taking our network of public and semi public chargers to nearly 3,100. Tata Power's EV charging network is now present in more than 500 cities with the company adding 18 cities during Q3. We also have installed more than 6,600 home chargers in Q3, taking the total number of home chargers to more than 30,000 -- and what we have seen is that there is a huge amount of traction. And we range concerned that people used to have is no more there while using electric vehicles either within the cities or for their intercity travel. Our distribution business in Odisha is doing very good and continues to give excellent service, both in terms of reliability and also in customer services, in all the 4 DISCOMS in Odisha. With all our 4 DISCOMS reporting a sharp reduction in AT&C process, which is nearly 26% on an average compared to 36% 1 year back. We expect that Odisha DISCOMs business will continue to post profit in this quarter as well as in the subsequent quarters. We have installed in fact, 5 lakh smart meters across Tata Power DISCOMs across Odisha, Mumbai and Delhi, which is the highest by any power company in the country. Moving to the balance sheet. I'm happy to share that our net debt has reduced further by INR 1,350 crores in December quarter. The fall was driven by the company's robust operating performance, lower CapEx, and inflow of the outstanding proceeds from divestment of Arutmin and other investments. Combination of healthy growth in the operational profit and declining debt has further improved the leverage ratio. Our net debt-to-underlying EBITDA has improved from 3.5% in the last quarter to close to 3.0% in this quarter. Our net debt-to-equity has improved from 1.32 in the prior quarter to 1.23 in this quarter. We are committed to maintain this healthy leverage going forward. With sustainable development at the heart of our operations, we are pleased to see several agencies acknowledging our efforts. In fact, Tata Power has emerged as the top ranking power utility in the countries by scoring 67 points in S&P rating with 85 percentile. The company has also improved its CDP climate change rating from [ e in 2021 to b in 2020 ]. Tata has also won the Gold Shield Award and the ICA Award for Excellence in Financial Reporting for 2020. Tata Power continues to steadily move towards its long-term aspiration built on businesses of the future while maintaining a healthy balance sheet. This is clearly visible from the improvements seen in the operational and financial metrics in each passing quarter. We look forward to your continued support. With this, I will ask Vikram to go to the question-and-answer session.

Thank you very much, sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] We have a first question from the line of Sumit Kishore from Axis Capital.

My compliments on a strong quarterly performance. My first question is that revenue for the quarter as per notes to accounts includes an amount of INR 4.39 billion relating to earlier quarters? Could you explain the nature of this income and what has flown to PBT and the PAT level? And does this take care of the entire amount that you had to recognize for Mundra UMPP?

Thank you. I think it's a very important question. The answer would be a bit complex because you have to kind of just bear with me. As you had already seen, we bought this CERC order under Section 11, which talks about complete pass-through of the fuel price. Now this is for the period starting from May to December. Since we are reporting the quarterly accounts, the amount pertaining to the previous quarter, have to be disclosed separately [indiscernible] the results that we have seen. I think the better way to look at is, yes, for the quarter, there's a pass-through, which has been agreed upon. But I think since it also has a previous quarter results, if you have to look at the complete 9 months result, yes, of course, there will be a backlog that we still need to resolve for, and that is why we are working with the revised PPA to ensure that our losses comes down further.

Yes. that does not answer my question. What is the impact at the PBT and PAT level for the amount of INR 4.39 billion this quarter into earlier quarters?

Yes. So I think this is full -- this fully goes into tax, subject to tax, of course. The reason is very clear. The cost was absolutely booked in the period when the powers were applied, and we were looking at the differentiated tariff now, which you received now.

Okay. So what is the update on Mundra UMPP now? What was the -- so I assume that there was no under recovery versus same cost in Q3? Or what was the setoff which was given for the profits that you earn in the [ Indo ] coal mine? And was there any under recovery at all against capacity charges? And how is the present quarter playing out now that the section 11 level benefits have ceased -- and so what is the outlook or how far is the final outcome?

Yes. So there are a couple of questions that you have bundled together. In the capacity charges, which as per the CERC order under section 11 have to be completely passed on to the producers. So yes, that we will be getting. There's energy charges which is to ensure that it's a complete pass-through of fuel. Why I use the word complete pass-through fuel, there is this small element of under-recovery because besides fuel there is various other cost elements, which is also there. So there will be some -- and of course, there's a one element of mining profit sharing as well, which is part of the CERC order. And that -- to the extent of the profit mining share, we will have the under recovery.

Okay. So how is it progressing now, now that in January and for the Q4 quarter, how do the benefits continue? Or what are the discussions ongoing and what is the outcome expected?

Yes. The discussions are ongoing. And given that the Section 11 notification with the MoP and now rectified by CERC would respect the revised PPA to be almost on similar lines, but the discussion is ongoing right now.

Okay. So the amount which has been additionally built for prior quarters has that been recovered from the states? Or is there any dispute regarding those amounts?

No. So I think there are a couple of things again here. Is the amount that we have to receive on account of Section 11, the billing has happened now in the month of January, so it's not reflected as a recovery in December. Those recovery will happen now. And of course, for the previous 3 years, that is -- since the H1, that amount we distributed across various cycles, right? So that's why I'm saying it's very difficult for us to kind of respond on the phone. But what we can do is, for those who are interested, you can drop a letter to Rajesh and Rajesh will provide you the details.

Sure. So just hopping on this one, so benefits under Section 11 has still not been recognized. So these amounts for prior period which are flowing into profit are they relating to what exactly?

The Section 11 revenues have been fully recognized, that's what I'm trying to tell you. The amount pertaining to the earlier period -- to your earlier question, it's a complete pass-through in the past because the cost that was incurred was already recognized inn the previous period.

Just my last question on the TPSSL business. The order book at INR 154 billion, which is indeed quite strong, but revenue for the quarter, if I look at the solar -- utility-scale solar EPC business, excluding rooftop and pumps is below INR 8 billion absolute terms, and it's down year-on-year. So I understand that certain projects are not -- have got deferred, but what is the outlook here? And the extent of difference seems to be pretty high.

Yes. So let me try and decode this item by item. If I look at on a 12-month rolling basis, especially on the large scale utility, we almost installed about 1 gigawatt closing and almost 500 for the next quarter, the current quarter in the pipeline. So for the full year, we can expect about 1.5 gigawatts, which is a pretty decent thing. When it comes to the EPC, that's where we have gone slow, very strategically and deferred some of the projects for the subsequent quarters because we have seen the price of the models and sales were very, very high and off late as you're already seeing that the prices are significantly coming down. And to that extent, you will get those benefits in the subsequent quarters. So that was more of a strategic intent. On the pump, so we took a very strategic position of choosing the state that we want to supply and choosing the kind of SKUs that we want to supply. This was again on account of high prices of modules and high prices of cells with things now recovering, we will accelerate further now.

[Operator Instructions] We have next question from the line of Mohit Kumar from DAM Capital.

My first question is can you confirm the operational capacity of renewables and under construction capacity and the time lines of when you expect this capacity to come up in the sense of what the capacity is expected to come in FY '23 and FY '24 and expected EBITDA this portfolio at 75% level, of this direct capacity.

Yes. So we already have an installed capacity of 3.9 gigawatt on a large scale. The total in pipeline is about 2.4 gigawatts. We expect about commissioning of 500 megawatts in the fourth quarter. So for the full year, you should see close to about 1.5 gigawatt of addition in the large scale project. The time line as you said, 500 will already get commissioned in the current quarter out of 2.4 and the way the figure goes this -- we start commissioning next year, over very various quarters, they are in various stages of implementation. And hence, normally, you can expect between 12 months to 18 months for the projects that have just been one and the ones that are in the pipeline, most of them will get executed next year.

Okay. Can you please let us know the coal volumes. I understand the coal volume are slightly softer side in CY '22. Can we expect this coal volume to pick up in CY '23?

Coal volume in what sense to pick up...

Million tonnes, sir. Million tonne in Indonesian mines. [indiscernible].

Okay. Are you talking about the coal mining? .

Yes. Volumes, yes. Million tonnes, what was the volume for the 9 months? And do you expect this to pick up in this -- in the remaining part? Because what had happened last year, I think it was very, very subdued.

Yes. So I think -- there have been static readings over there, which have definitely impacted bit up of mining, but they are in the process of planning for the next year now. I will suggest you drop us a mail and we kind of let you know as to what kind of plans they will have once we kind of know it. For example, in KPC, normally, everyn year would have a mining plan of 50 million tonnes, and it's plus minus 10%, depending upon the various things, including the demand supply gap, logistics issues, it could be veins and whatnot, right? But give and take, now we are every calendar year, they expect to be a mine about 50 million tonnes.

We have next question from the line of Puneet Gulati from HSBC.

My first question is on Mundra. Now that Section 11 is it quite clear [indiscernible], can you provide some sense of profitability at EBITDA level for Mundra and other important metrics for that period, the 9-month period?

I would request you can drop a mail to Rajesh. And as we have said in the previous call, Mundra is no more a separate company for us. It's part of the Tata Power. So we do not call out a separate item for that. But as I said to the previous question, I think we are still under recovery because of the mining profit share. And of course, this order for CERC is only for the period of May to December, right? And as such, in the period of April and May, we'll still have a higher losses. So for us, on a YTD business, we still have a significant recovery. And we just hope that the new agreements that we are proposing or discussing to take care because unfortunately, we have burned a lot of cash in this business over the years.

Yes. But I thought the order of CERC was quite clear, right, in some sense that 30% of the coal that you take for Mundra only to that extent, you will have to share the mining profit. In that context, you should actually be making decent EBITDA, isn't it?

No. If you only look at the quarter because this order pertains to a period beyond the quarter, yes. But then to the extent that we are sharing the profit, the nice profit for the coal that we have been consuming to that extent, it...

30%, right? I mean it was only 30% of the coal that you're consuming, not for the full, right?

Yes, 30% of the coal.

Yes. So would it not have rendered the Section 11 period strong EBITDA number?

What happens is it's important to, again, not just to look at the quarter because...

I'm talking about the full Section 11 period starting from May to December. Some sense because that's the number 1 can expect, right? I mean [indiscernible].

Of course, that is correct. At the EBITDA level, yes, but a better way to look at it, how does it look like for the entire 9 months of duration, wherein we had various kind of arrangements. So I think what's also important is to look forward we should not be making any under recoveries and that's the main point of discussion right now for us.

All right. I'll take it separately. But on the Tata Power solar, how should one think about the EBITDA margin? So you explained about the potential revenue growth. How should one think about the margin profile of this business?

You're talking about solar gross shops, or?

No, the solar EPC business. The entire...

See, solar EPC, normally, we have been targeting at a PAT margin of 5% to 7%. And again, that is on a portfolio level. Some of them will be lower and some of them will get higher. But on an aggregate level, that is what we want to target. If you look at our business for the first 9 months, it has been said lower than that because, of course, we had pretty higher sales and module prices. And as a result, we have planned current deferment of the projects on the subsequent quarter. But on a consistent basis, our aim is to kind of have at least a 5% PAT margin of the EPC business.

If I have my numbers right, I think Q2 had come down to almost stabilized number, right? It has a nice 9% PAT margin -- back to 3% PAT. So I thought problems should have been solved by Q2, and now they are on a steady PAT.

Yes. So if you look at the 3 quarters together YTD, right? YTD, I think it is 3% plus...

Correct. YTD is fine because Q1 was back, right? It was a negative so loss-making quarter.

Correct. That is when we decided to take the second call [indiscernible] some of the projects, including reaching out for the orders, to renegotiate the prices and everything else. And to the extent we see some better team coming in quarters quarter 3 and hopefully, this will dip in the module and sell prices that we see now, and we should be able to improve on that. We are therefore, we're kind of saying that we target a 5% EPC margin, PAT margin.

We have next question from the line of Anupam Goswami with BOB Capital Markets.

Sir, I'll take the Mundra operational numbers later on. But my question is on the -- this quarter, now that the Section 11 has ceased to operate, do we see any breakeven sort of position in Mundra in a new PPA? Or we do actually see some profit coming also in the Mundra unit?

Are you talking about the fourth quarter from Section 11?

Yes, fourth quarter after the Section 11.

Yes. So our intent is to see that as the PPA can stand in the line of Section 11. At least the principle that has been set in Section 11. So to that extent of mining profit, yes, there might be certain under recovery. But even if that happens, I think we'll have a big relief given the big quantum of losses that we have been making in the past.

So overall to a bottom line to say that there will be some recoveries continuing in Mundra and maybe the losses will narrow down, but entirely profits will not reflect if I just summarize in one line. Will I be correct in this?

So the idea is to recover the fuel cost. The idea is to kind of see that we keep on getting our capacity charges. But yes, to the extent of the mining profit that we have to share, we have some impact.

Okay. And sir, your capacity charge and fuel costs currently are coming at, at what level, sir? If you can give me a ballpark sort of number.

We will not have it readily available. But intensively, we're looking at the fuel cost pass-through. But if you drop a message to Rajesh, he might take those numbers and share it with you.

We have next question from the line of [ Dhananjay Machi ], an investor.

Congratulations on the numbers. Can you please update why there is a drop in the revenue and transmission and distribution system from the last quarter?

Sorry, your voice was not [indiscernible]. Okay. So look, I think if you break up between transmission and distribution, transmission is more of a consistent asset, we don't have a profit. When it comes to distribution business, we have kind of done some cleaning up with respect to the expected credit loss, which is kind of looking at the past receivables and trying to recover that. And if not, trying to still get on the P&L.

Okay, sir. And any capital utilization, current capital utilization?

Current capital utilization of which business?

Average current capacity utilization.

So are you talking about the Mundra plant or it's kind of looking at it segment separately. If you look at the investor deck, which has been uploaded, they have the complete breakup.

We have next question from the line of Balasubramanian A with Arihant Capital.

Congratulations for great set of numbers. My first question regarding CapEx in solar models. I think the current capacity around 35 megawatts, so what kind of capacity addition is expected in the next 2 to 3 years, what kind of CapEx amount? If you could throw some light on that?

Yes. So I think in the previous strategy deck that is already uploaded on the website, we kind of said that I intend it to kind of do 2 to 3 gigawatts every year. We have presented a refreshing for strategy. But yes, our plan is to kind of big time into solar and almost 80% to 90% of our CapEx that we are presently allocating is going through our green business. So I think that trend will continue.

We have next question from the line of Rajesh Majumdar with B&K Securities.

Sir, my first question was regarding our module capacity. So I have a basic question now that the module price has corrected to INR 0.21 or so, what is the feasibility of setting up a plant versus importing modules. So if the prices continue to correct more hypothetically to slightly more lower levels. Is there a long-term viability of this module plant or rather we import at lower prices? That was the first question.

So let me try to respond to this. First of all, when you import modules, you need to pay the basic customs duty. So today, the customer duty is 14%. So even if we are seeing the reduction in the prices of modules, it will always be much higher than what is the price at which we will be manufacturing because what we will be doing, we'll be bringing the wafers, making the cells and the module. And on wafers, there is no customs duty. So there is an arbitrage, and I think the cell and volumes that we will manufacture will be much more competitive, even with the very low prices of the imported volumes that we get from China or any other country.

Is it a significant [indiscernible] or still? Or it's like with the fall in prices, it's like would be 10%, 15% or some [indiscernible]

I just mentioned to you, 40% differential on customer duty.

Customer duty. Yes.

So even if theoretically, their prices are 20% lower than Indian prices, it would still be more than the Indian price than it is imported.

And sir, my second question was, we will see a considerable increase in the renewable additions now going forward, hopefully, since the prices are falling and there is renewed focus in the sector. But what I've seen is that despite a year of sterling profits from the joint ventures and a strong cash flow, our debt is going up. So in the event of our renewable additions going up to, say, 2, 2.5 gigawatts per annum, will there be a significant increase in the debt level from the current level? Or is it not sustainable?

Yes. I think the way to look at it -- when we look at a contented level, we do a capital allocation across our various businesses. As we speak to you and also as you see in the deck, our net debt has actually gone down by INR 1,300-odd crores in the current quarter. So we have landed with a total debt position of about INR 38,000-odd crores. right? So yes, we kind of allocate our capital, and my location in the solar right now and in the renewable businesses, but we are mindful of a leverage our local debt as to how we manage it.

So you don't see the impediment for the long-term growth of the renewables business?

Absolutely not. And I think it's, again, not a correct idea to only look at an absolute debt when the business is really growing, I would rather encourage everyone to talk about the leverage because finally, what matters is leverage. Finally, what matters is the COVID, right, at least. And if you compare our business, given that we are in an infrastructure space to any other players, we have strong balance sheet.

We have our next question from the line of Anupam Goswami from BOB Capital Markets.

Thanks for taking my question again. Sir, my question on the overall vision of the company, where do we see in the growth-oriented factors? Where do we see the capacity growing? And which segments -- is it only the renewable segment that we are trying to grow? Or are we looking at some transmission lines in those networks because that was also a plan at one time, and we haven't seen any movement over there yet.

In last 2 years, if you see, we went and took over the 4 distribution company. We added 9 million customers who are earlier existing 3 million. So there has been a huge capacity addition in distribution. If we look at our transmission business, last year, we went ahead and bid out 2 of this test assets. And both those projects are now under implementation. So we have been quite aggressive in terms of adding capacity in our distribution and transmission. As we have been earlier also sharing with you that there is a cutoff that we consider for any of these projects in terms of what sort of returns we are looking at there. And while we have been bidding or some of the projects as the prices or the valuations that we are doing, we don't feel it will meet our overall objectives. So -- we are very concerned if the margins are not there. And any bid that we do, we ensure that it meets our overall long-term return metrics. So apart from renewables, we are definitely doing a lot of work in distribution and also in the space of transmission. And as is well good opportunity for us, we will be bidding for all those projects.

Renewable at what run rate are we adding capacity, are we looking at?

So in this year, we have already won to more than 2 gigawatt of renewable capacity customer subscription so that ended -- and all these projects will get incremented in the next 12 months to 18.

Right. And going forward, like FY '24 and '25, should we look at a similar run rate of addition?

Yes, absolutely. This excludes the group captive. So that also is going at a very fast pace, and you can expect at least 500 to 800-megawatt of the group captive getting added every year.

So about FY '26 or '27, we'll reach about 8 to 9 gigawatts of capacity, if I'm not wrong.