Tata Power rallies 8% on merger proposal with 3 wholly-owned subsidiaries

Tata Power shares surged as much as 8.3 per cent to Rs 57.4 on the BSE on Thursday after the firm reported June quarter result post-market hours on Wednesday. The company’s net profit rose by 10 per cent to Rs 268 crore for the quarter ended June on the back of reduced expenses, compared to a net profit of Rs 243 crore reported during the same period a year ago.

However, it’s consolidated profit before tax (PBT) and exceptional items for the June quarter dipped 31 per cent to Rs 480 crore, as against Rs 605 crore PBT posted in Q1FY20. Q1FY21 Consolidated EBITDA stood at Rs 2,037 crore including Renewable EBITDA of Rs 588 crore as compared to Rs 663 crore in Q1FY20 mainly due to delay in the solar EPC projects due to Covid-19.

“The Company maintained stable performance despite lower profits from Solar EPC businesses mainly on account of lower financing cost and stable performance across all clusters. All other subsidiaries & Joint Ventures continued to perform well,” the company said in a statement. That apart the company won new renewables bids totalling 220 MW during the quarter under review.

“Net debt declined to Rs 44,400 crore on account of asset monetization and WC management despite the current Covid-19 environment. While certain clarity is pending with regard to upcoming new regulations for Indonesian coal mines (concerning tax and royalty), at current levels, we view the risk-reward as favourable. Divestment-related measures (International Shipping business, Arutmin, and Tata SED) and approval for the infusion of Rs 2,600 crore from promoters would continue to aid debt reduction. Debt reduction should lead to lower interest costs, and with normalization in its EPC businesses and some WC, we expect EPS to increase at a 9–10% CAGR over FY20–23. The approval of a tariff hike at Mundra, the merger of CGPL & Tata Power Solar with TPWR, and favourable InvIT valuations provide upsides,” said analysts at Motilal Oswal Financial Services. They have upgraded the stock to ‘Buy’ with a target price of Rs 66.

Apart from Q1 results, the company announced the merger of three of its subsidiaries with itself as a part of its strategic initiative.

“Three wholly-owned subsidiaries i.e., Coastal Gujarat Power Ltd. (CGPL), Tata Power Solar Systems Ltd (TPSSL) and Af-Taab Investment Company Ltd (AfTaab) are proposed to be merged with Tata Power (parent company) for greater synergies in the financing, compliance, and oversight. This merger, subject to necessary approvals, is part of a strategic initiative to simplify the group holding structure and a broader plan to set the company for future growth through fiscal consolidation and strengthening of balance sheet. The merger aims to achieve the long-term objectives by facilitating efficient use of cash and making available corporate support to the businesses of the said wholly-owned subsidiaries as needed,” it said in a statement.

As of June 30, CGPL held total assets worth Rs 18,403 crore, while its net worth was Rs 3,158.79 crore. It reported a turnover of Rs 1,742.28 crore for the first quarter of FY21. TPSSL, on the other hand, had total assets worth Rs 2,933.56 crore. Its net worth was Rs 624.77 crore, while turnover during the June quarter was Rs 406.78 crore.

“CGPL is engaged in the business of generating electricity at its UMPP (4150 MW installed capacity), while TPSSL is engaged in the business of a manufacturer of solar photo-voltaic cells and modules as well as in the Engineering, Procurement and Construction (EPC) in the solar energy market, wherein the manufactured cells/modules are utilized,” the company said.
“Such an arrangement would further facilitate higher dividends from the coal mines in Indonesia as well as tax savings on the interest component of the proposed renewable InVIT. We highlight that the proposed merger is subject to approvals from various stakeholders including the beneficiary states from Mundra UMPP, though it has no bearing on the resolution of the under-recovery at Mundra UMPP,” said analysts at Kotak Institutional Equities. They maintain ‘Buy’ call on the stock with a fair value price of Rs 62.