10 October 2011
Update | Sector: Utilities
Tata Power
BSE Sensex
16,557
S&P CNX
4,980
CMP: INR104
TP: INR105
Neutral
Option to limit UMPP losses exists, Coal earnings to support...
Stock price correction helps build long-term investment case
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1,6,12 Rel. Perf. (%)
M.Cap. (INR b)
M.Cap. (USD b)
TPWR IN
2,373.3
145/94
5/-6/-9
246.8
5.0
Mundra UMPP losses are not due to poor cost structure, but "constrained"
PPA framework (only 50% fuel cost pass through). We have come across
comparisons with Dabhol project, which in our view is inappropriate.
Options exists to contain losses, while favorable outcome of bi-lateral
negotiation could provide upside, along with possible tax set-off.
Net long position on coal to yield positive returns on integrated investments.
20% correction in stock price in three months helps build long-term
investment case. CMP adequately captures most business challenges
Y/E March
Sales (INR b)
EBITDA (INR b)
NP* (INR b)
EPS (INR)*
EPS Gr. (%)
BV/Share (INR)
P/E (x)
P/BV (x)
EV/EBITDA (x)
EV/Sales (x)
2011 2012E 2013E
69.2
15.9
17.5
7.4
18.4
45
14.1
2.3
19.4
4.5
74.2
19.0
23.3
9.8
32.9
47
10.6
2.2
17.6
4.5
80.6
19.6
22.3
9.4
(4.0)
49
11.0
2.1
17.2
4.2
Mundra UMPP cash flow strain due to constrained PPA structure, not poor
cost economics:
Losses in project are due to poor PPA structure, which entails
year-1 tariffs at INR2.21/unit. Despite this, the project continues to be EBITDA positive
(expect year-1 EBITDA on full commissioning at INR5.5b). We have also come across
the comparison of the project with erstwhile Dabhol (Enron) project, which is
inappropriate given striking differences - while Dabhol had issues of cost viability and
project economics, for Mundra UMPP, the key issue is "constrained" PPA structure.
The all-inclusive generation cost of INR2.8/unit (on imported coal) for Mundra UMPP
is competitive and compares with tariffs INR2.5-2.8/kwh for several of NTPC's new
projects (based on domestic coal linkages). The key reasons leading to a competitive
cost structure are: (i) significantly lower capex cost, which entailed BTG award at
INR18.5m/MW in 2007 v/s current cost of INR30m-33m/MW, (ii) integration in the
chain, (iii) scale economics, and (iv) strong execution. However, due to the constrained
PPA structure, equity investors have not benefitted from these 'moats'. Post
commissioning of the Mundra UMPP, the profitability of the chain (coal mining +
Mundra UMPP) will decline from INR13.7b in FY12 to INR8b in FY14. But the RoE in
the chain will be reasonable at 15%, though lower than ~24% expected in FY12.
Possible options to curtail losses exists for Mundra UMPP:
Options to improve
the viability of Mundra UMPP and possibly salvage profitability include: (i) operating
the project at contractual norms, which entails 100% recovery of fixed charges at
80% plant availability (PLF of 72-78%), (ii) usage of low grade coal, (iii) possible
capacity expansion by 1.6GW (brownfield) and (iv) leveraging tax benefits on losses.
Any regulatory concessions can lead to improvements in project economics. We
have not factored a large part of these upside possibilities in our estimates.
Expect meaningful increase in profitability of KPC/Arutmin mines:
KPC/Arutmin
mines (30% stake by TPWR) have plans to ramp up production to 100mtpa v/s current
levels of 64m tons. The planned expansion will also entail productivity improvements
and conversion of operations into 'all weather' mining. As a result, we expect meaningful
increase in the profitability of KPC/Arutmin mines.
Stock price correction helps build long-term investment case:
The TPWR stock
has corrected by 20% over the last three months. While we maintain our
Neutral
rating, we believe that correction helps build an investment case for long-term investors.
Net long position on coal provides positive leverage to commodity prices.
RoE (%)
7.5
7.7
7.0
RoCE (%)
6.2
6.6
6.2
* Consolidated; EPS calculated on fully
diluted equity
Shareholding pattern % (Jun-11)
Others,
16.1
Promoter
31.8
Foreign,
23.6
Domestic
Inst,28.5
Stock performance (1 year)
Tata Pow er
Sensex - Rebased
160
140
120
100
80
Nalin Bhatt
(NalinBhatt@MotilalOswal.com) +91 22 3982 5429
Satyam Agarwal
(AgarwalS@MotilalOswal.com)
/ Vishal Periwal
(Vishal.Periwal@MotilalOswal.com)