Tata Power Company (TPC) sprung a positive surprise in Q4FY16 with Mundra UMPP reporting a nominal profit and solar business also turning black. Despite ~INR1bn exceptional items, consolidated PAT at INR3.6bn was marginally lower than our ~INR3.9bn estimate. APTEL has directed CERC to compute relief to be provided due to change in Indonesian coal pricing norms by July. Meanwhile, TPC continues to eye investments in renewable space and overseas markets for growth. Owing to the delay in completion of Arutmin transaction and weak outlook on coal, we cut target price to INR82 (INR98 earlier). Maintain ‘BUY’.

A few subsidiaries turnaround-but not enough to move earnings

Good part of TPCs numbers was earnings surprise in Maithon/Mundra as well as positive contribution from solar. While Mundra UMPP reported PAT of INR90mn due to annual truing up of fixed charges, Maithon project, riding commencement of 150MW PPA with Kerala, reported INR740mn PAT, which is expected to sustain going forward. Tata Solar too turned around to report INR40mn PAT (INR40mn/INR240mn loss in Q3FY16/Q4FY15). However, TPC’s standalone profit was lower due to INR2.25bn provision towards investments in Tata Teleservices. Additionally, the exposure of standalone entity to Mundra now stands at INR35bn, which also has sub-optimal returns. EBIT of coal mine for the quarter was stable at ~INR2.6bn (QoQ), but the concern is that SPV’s debt of USD900mn has not dipped.

Growth plans largely through renewable and overseas assets

TPC does not appear to be in value unlocking mode and capital generated is likely to be deployed to commission ~500MW renewable projects in pipeline. The company may also continue to pursue programme of adding renewable assets in Africa/Georgia.

Outlook and valuations: Awaiting CERC’s decision; maintain ‘BUY’

Given that TPC has infused INR35bn worth of sub-debt in Mundra UMPP, the APTEL directive to CERC to compute the relief under change-in-law is critical for the company going ahead. We have revised down FY18E earnings 5% on revision of our coal realisations. Factoring in these and the delay in closure of Arutmin transaction and resultant increase in loans, we have revised our SOTP-based target price to INR82 (assumed Mundra past CT recovery of INR10bn). At CMP, the stock is trading at 1.2x FY17E and 1.1x FY18E P/BV. We maintain ‘BUY/SP’.