Tata Power
BSE SENSEX
30,834
S&P CNX
9,491
29 June 2017
Update | Sector: Utilities
CMP: INR82
Maintain Sell
TP: INR68 (-17%)
Sell
Challenges remain, Trombay Unit-6 PPA at risk
We met Tata Power’s (TPWR) management and visited its Trombay power plant.
Key highlights:
Trombay visit:
While Mumbai coal/RLNG-based generation assets are
uncompetitive, their PPAs are likely to get extended for a few years after expiry
in FY18 due to transmission constraints. However, the PPA for Unit-6
(regulated equity of ~INR4b), which has not got schedule for the last two years,
is at risk.
Mundra – focus turns to cost reduction and additional revenue:
The Mundra
project can potentially save from opportunistic coal sourcing and earn
additional revenue via sale of power from uncommitted PLF (if regulator
permits).
Value unlocking from non-core asset sale:
Arutmin coal mine sale is on track
as small tranches of payments have started flowing; sale of stake in Tata
Communications is likely after the land issues with the Government of India are
resolved.
TPWR has slowed investment in renewables due to intense competition:
RE is
a potential growth driver, but the market there is very competitive and to an
extent unreasonable. Management has rightly slowed down investment.
Cut estimates by 6%/4% for FY18/19:
We have cut PAT estimates by 6%/4%
for FY18/19E to INR17b/INR18b as we remove earnings for Trombay Unit-6 and
Arutmin. This is partly offset by interest cost savings through proceeds of
Arutmin sale in FY19E.
TPWR is struggling for RoE-accretive growth
opportunities. The regulated
business, which earns superior RoEs, is facing many challenges and lacks
material growth. RE is a potential growth driver, but the market there is very
competitive and to an extent unreasonable. Earnings have got a boost from an
increase in coal prices (supported by policy actions in China), but volatility in
coal prices drives up cost of equity.
We value the stock at INR68/share; Maintain Sell:
We prefer to value the
stock on P/BV basis because RoE closely tracks free cash flow to equity for
TPWR. A ratio of 1.1x (RoE/Ke) is appropriate as it lacks RoE-accretive growth.
Therefore, we value the stock at INR66/share based on 1.1x FY19E P/BV. The
stock trades at 1.3x FY19E P/BV for return of equity of ~11.3% and limited
growth. Our estimates are based on USD70/t average coal price for 6,000kCal
for FY18 (spot is USD77/t).
Key risks:
(1) Higher-than-estimated coal prices and savings in coal sourcing for
Mundra. (2) Value unlocking from non-core asset sale.
SOTP at INR83/sh (INR46 in core + INR16 in group + INR20 in parent):
On
SOTP basis, the equity value is INR83/share (Exhibit 2), but this includes
INR16/share for the value of investment in group companies and INR20/share
for Tata Sons, the parent. One needs to be careful in adding value of Tata Sons
to avoid valuation loop. The value of core business is only INR46/share.
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg Val ( INRm)/Vol m
Free float (%)
TPWR IN
2,705
91 / 67
1/-8/-3
220.4
3.4
407
67.0
Financials Snapshot (INR b)
Y/E Mar
2017 2018E 2019E
Sales
EBITDA
NP
EPS (INR)
EPS Gr. (%)
BV/Sh. (INR )
RoE (%)
RoCE (%)
P/E (x)
P/BV (x)
279.0
58.5
14.0
5.2
21.1
43.5
11.2
6.6
14.9
1.8
341.6 358.7
67.1
18.3
6.7
30.7
48.7
14.6
6.6
11.4
1.6
69.5
19.0
7.0
3.8
54.2
13.6
6.5
11.0
1.4
Shareholding pattern (%)
Mar-17 Dec-16 Mar-16
As On
Promoter
DII
FII
Others
33.0
23.5
27.3
16.2
33.0
24.0
26.5
16.5
33.0
24.5
26.2
16.3
FII Includes depository receipts
Stock Performance (1-year)
Tata Power Co.
Sensex - Rebased
95
85
75
65
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Dhruv Muchhal
(Dhruv.Muchhal@MotilalOswal.com); +91 22 6129 1549
Sanjay Jain
(SanjayJain@MotilalOswal.com); +91 22 6129 1523

Tata Power
Mumbai generation PPAs – one unit at risk, for now
Mumbai generation business has installed power capacity of 1,877MW (details
in Exhibit 1). The PPA for the plants is expiring in March 2018, when the
regulator will decide on the renewal.
Of the total, 500MW is based on oil/imported gas (Unit-6) and has variable
generation cost of INR11/kWh. The unit is shut down for the last two years (kept
on hot standby for contingencies). Given its merit order positioning and limited
use, we believe the PPA for Unit-6 would not be extended beyond FY18.
We estimate the regulated equity of Unit-6 at ~INR4b (Mumbai generation total
regulated equity is ~INR20b), and remove earnings for Unit-6 from FY19.
While the remaining imported coal-based units (except hydro and domestic gas-
based Unit-7) are also uncompetitive, the PPAs are not at risk, at least in the
medium term. There are transmission constraints in getting power from outside
of Mumbai due to right-of-way issues.
A few consumer representatives are pursuing a case for investment in
transmission and competitive bid for the renewal of the PPAs, which would
compel the government/regulator to find a solution to the transmission
constraint, in our view.
However, given the requirement in the interim, we believe the PPAs would be
extended at least for 2-4 years. The imported coal-based plants are running at
~75% PLF and thus cannot be shut down until an alternate arrangement is
made. We are not factoring in the risk of these PPAs expiring after four years in
our valuation as the sale of land will have similar value.
Going slow on renewables, waiting for market to normalize
The renewable energy market is getting extremely competitive as the recently
quoted tariffs suggest single-digit IRRs, according to the company.
TPWR has ~300MW of RE projects in pipeline, which would be executed over
the next one year. The company expects the market to normalize thereafter and
then focus on capacity addition.
The opportunity size in renewables is huge, given the government’s push, while
TPWR has a competitive edge given its ability to source debt at low cost. Waiting
for market normalization is a suitable strategy, in our view.
In the interim, however, it would impact our earnings growth estimate for the
renewables business. We are estimating renewables business (ex-standalone)
PAT to double in three years to INR3.5b by FY20.
Mundra – looking at means to squeeze savings
Prior to the Supreme Court denying compensatory relief, Mundra sourced coal
primarily from its captive mines in Indonesia. However, the company is now
looking at opportunistic, discounted cargos to drive savings. It saved ~INR1b in
4QFY17 through such deals. We see this as marginally positive, but would wait
for delivery of such savings for a few more quarters before factoring them in our
estimates.
Mundra is also negotiating with the DISCOMs to allow it to operate the plant at
more than the agreed PLF of 80%. It is proposing the DISCOMs to forgo their
first-right-of-refusal on additional generation and allow it to sell power on the
exchanges/power market. It would share part of the gains with the DISCOMs.
2
29 June 2017

Tata Power
The deal is win-win for both Mundra and DISCOMs, in our view. At current low
merchant power prices and high coal prices, the earnings potential is
insignificant. It, however, would be a good hedge if the coal prices were to
decline (TPWR is net long on coal and thus loses when coal prices decline).
In our view, TPWR should also seek to replace debt in Mundra with equity by
leveraging either the standalone and/or investment entities. Mundra is loss-
making and has huge accumulated loss. By transferring the interest cost to a
profit-making entity, TWPR could gain from tax saving on the interest cost –
annual saving of ~INR3b. We understand that there could be some tax issues,
which would need to be handled.
Arutmin sale progressing; Sale of investments unlikely in near term
TPWR has started receiving tranche payment on the sale of Arutmin coal assets.
As a result, we incorporate the proceeds from the transaction of USD400mt in
FY19E. Resultantly, we also remove the earnings from Arutmin.
While TPWR is focused on selling some non-core investments/cross-holdings to
de-lever, any meaningful progress is unlikely in the near term. Of its quoted
cross-holdings, a significant portion is its investment in Tata Communications
(TCL). There are pending land sale issues at TCL with the Government of India,
which impacts the value of promoter stake in TCL. Until there is resolution of the
issue, realization of the investment in TCL is unlikely, in our view.
Other highlights from Trombay power plant visit
The Unit-5 of 500MW is more than 30 years old. However, it continues to
operate efficiently at high PLFs, low auxiliary consumption and relatively low
station heat rates. Unit-5 was the first unit of 500MW size in India.
The Trombay power plant is among the few power plants in India that has FGD
(flue-gas desulfurization units) installed and is thus compliant with the revised
emission norms.
The auxiliary equipment of the various units are inter-connected, which
improves the reliability of the power station in case of break-down at one of the
units.
The coal-based units can operate at a minimum load of 75% to be efficient.
Running the units below the limit would create thermal stress and reduce asset
life.
The coal-based units are not designed for domestic coal, which have higher ash
content. Trombay would also face problem in disposing the high ash generated
with domestic coal.
29 June 2017
3

Tata Power
Exhibit 1: Tata Power Trombay and hydro power assets
Capacity
MW
500
500
180
447
250
1,877
CoD
Jan-84
Mar-90
Dec-94
Sep-09
Gen. FY16
MU
3,503
42
1,180
1,112
1,883
7,720
Norm. loan
INR m
6,811
4,204
11,015
Reg. Eq.
INR m
16,197
3,489
19,686
FC
INR m
10,726
2,745
13,471
FC
INR/kWh
1.84
VC
INR/kWh
3.47
9.38
2.10
Unit 5
Unit 6
Unit 7
Hydro
Unit 8
Coal, oil and gas
Oil and Gas
Gas
Hydro
Coal
1.46
3.48
1.74
Source: MOSL, Company
Exhibit 2: Sum-of-the-parts valuations
Regulated Business
Reg. Eq.
(a)
41,777
16,070
16,982
P/BV
(b)
1.7
1.5
1.5
EBITDA Equity
Value
d=axb
18,365 69,739
8,458 24,232
9,608 25,571
36,431
TPWR's share
Reg. Enterprise
(%) Eq. Val. Debt Value (EV)
(e)
(f)
(e+f)
100 69,739 56,106
125,845
51
12,358 37,498
49,856
74
18,923 21,783
40,706
216,407
EV
(g x h)
143,217
-134,179
156,871
165,910
EV
(j x k)
151,380
63,987
215,367
597,683
-472,059
11,452
32,921
53,384
223,381
2,705
83
Remarks
Mumbai & Jojobera (S/A)
Delhi
Maithon
Subtotal (A)
Mundra and coal JVs
RoE = 15.5%, g = 5%
RoE = 15.5%, g = 3%
RoE = 17%, g=0
Ke=11.3%
Assumptions
no under recoveries
RB Index USD70
RB Index USD70
DCF value of fixed charges
Under recoveries in Var. cost
PAT from coal JVs
Subtotal (B)
Other businesses
EV/EBITDA(x) EBITDA
(g)
(h)
18,884
10
-13,418
10
15,687
21,153
EV/EBITDA(x) EBITDA
(j)
(k)
8
18,922
8
7,998
26,921
68,817
Assumptions
TPREL
Haldia,SED, trading etc.
Subtotal ( C )
Consolidated
Consolidated EV (A+B+C)
Less: Debt
Investment unquoted
Investment quoted
Add: TataSons
Net Equity value
No. of shares
Target Price (INR/share)
at book value
20% discount to MTM
6673sh., INR10m/sh., 20% disc.
Inc. INR36 for group & parent
Source: MOSL, Company
29 June 2017
4

Tata Power
Financials and Valuations
Income Statement
Y/E March
Net Sales
Change (%)
Total Expenses
EBITDA
% of Net Sales
Depn. & Amortization
EBIT
Net Interest
Other income
PBT before EO
Regulatory inc./(exp)
EO expense
PBT after EO
Tax
Rate (%)
Reported PAT
Minority and Associates
Adjusted PAT
Change (%)
2015
337,276
-5.4
274,264
63,012
18.7
21,742
41,270
36,993
4,167
8,445
6,393
0
14,837
10,749
72.4
4,088
-2,410
1,678
-150.9
2016
374,802
11.1
286,876
87,926
23.5
23,764
64,162
34,765
2,970
32,367
-10,194
2,805
19,367
8,693
44.9
10,674
-1,940
11,539
587.5
2017
278,977
-25.6
220,510
58,467
21.0
19,886
38,581
31,140
2,022
9,464
-6,095
6,515
-3,145
-458
14.6
-2,687
10,142
13,969
21.1
2018E
341,566
22.4
274,445
67,121
19.7
21,363
45,758
39,965
4,395
10,188
0
0
10,188
6,004
58.9
4,183
13,054
17,238
23.4
2019E
358,016
4.8
289,198
68,817
19.2
22,662
46,155
39,047
4,395
11,503
0
-23,040
34,543
6,673
19.3
27,870
13,284
18,114
5.1
(INR Million)
2020E
377,109
5.3
305,665
71,444
18.9
23,849
47,595
37,993
4,395
13,996
0
0
13,996
7,628
54.5
6,368
13,607
19,975
10.3
(INR Million)
2020E
2,705
180,798
183,503
22,658
484,829
17,598
708,587
701,688
218,381
483,307
21,779
17,325
127,583
219,046
13,145
39,773
14,507
151,621
160,452
51,659
108,793
58,594
708,587
Balance Sheet
Share Capital
Reserves
Net Worth
Minority Interest
Total Loans
Deferred Tax Liability
Capital Employed
Gross Block
Less: Accum. Deprn.
Net Fixed Assets
Capital WIP
Goodwill
Investments
Curr. Assets
Inventories
Account Receivables
Cash and Bank Balance
Others
Curr. Liability & Prov.
Account Payables
Provisions & Others
Net Curr. Assets
Appl. of Funds
2015
2,705
122,716
125,421
24,926
423,419
14,014
587,779
583,351
202,217
381,133
36,505
66,258
27,326
243,207
18,442
55,640
21,064
148,062
166,650
52,354
114,296
76,557
587,779
2016
2,705
128,434
131,139
25,814
416,209
14,875
588,037
617,804
202,550
415,254
45,441
46,767
28,855
240,748
18,061
52,042
16,740
153,905
189,029
61,277
127,752
51,720
588,037
2017
2,705
115,090
117,795
18,690
503,198
17,598
657,280
597,716
150,507
447,209
21,779
17,325
108,592
226,458
15,996
38,321
20,521
151,621
164,083
55,290
108,793
62,375
657,280
2018E
2,705
128,108
130,813
20,109
508,441
17,598
676,961
635,647
171,870
463,777
21,779
17,325
114,924
214,739
12,476
35,870
14,772
151,621
155,583
46,790
108,793
59,156
676,961
2019E
2,705
165,042
167,747
21,392
485,827
17,598
692,564
668,837
194,532
474,305
21,779
17,325
121,184
215,808
12,769
37,651
13,768
151,621
157,836
49,043
108,793
57,971
692,564
29 June 2017
5

Tata Power
Financials and Valuations
Ratios
Basic (INR)
EPS
Cash EPS
BV/Share
DPS
Payout (%)
Valuation (x)
P/E
Cash P/E
P/BV
EV/EBITDA
Dividend Yield (%)
FCF(pre-int) to EV yield(%)
Return Ratios (%)
RoE
RoCE (post-tax)
RoIC (post-tax)
Working Capital Ratios
Fixed Asset Turnover (x)
Asset Turnover (x)
Debtor (Days)
Inventory (Days)
Leverage Ratio (x)
Net Debt/EBITDA
Debt/Equity
2015
0.6
8.7
46.4
1.3
209.5
2016
4.3
13.1
48.5
1.3
30.5
15.2
5.0
1.3
6.8
2.0
8.8
1.4
6.1
2.7
0.9
0.6
60
20
6.4
2.7
9.0
9.9
8.0
0.9
0.6
51
18
4.5
2.5
2017
5.2
12.5
43.5
1.3
25.2
15.9
6.6
1.9
12.4
1.6
-3.8
11.2
6.6
7.0
0.6
0.4
50
21
8.3
3.5
2018E
6.4
14.3
48.4
1.3
20.4
12.9
5.7
1.7
11.0
1.6
4.7
13.9
6.6
3.8
0.7
0.5
38
13
7.4
3.3
2019E
6.7
15.1
62.0
1.3
19.4
12.2
5.4
1.3
10.4
1.6
9.2
12.1
6.4
7.3
0.8
0.5
38
13
6.9
2.5
2020E
7.4
16.2
67.8
1.3
17.6
11.1
5.1
1.2
10.0
1.6
6.3
11.4
6.3
4.1
0.8
0.5
38
13
6.6
2.3
(INR Million)
2020E
71,444
117
0
-7,628
63,933
-32,851
31,081
13,990
0
0
-18,862
0
-998
-37,993
-5,339
0
-44,331
740
2,790
3,530
Cash flow statement
EBITDA
FX gain/loss
WC
Others
Direct taxes (net)
CF from Op. Activity
Capex
FCF
Int & div income
Investments(subs/JVs)
Others
CF from Inv. Activity
Share capital
Borrowings
Finance cost
Dividend
Others
CF from Fin. Activity
(Inc)/Dec in Cash
Opening balance
Closing balance (as per B/S)
2015
63,012
-5,611
10,493
-8,085
59,809
-34,936
24,873
2,078
0
-5,891
-38,749
20,692
-1,026
-33,842
-5,121
-3,089
-22,386
-1,326
13,845
12,519
2016
87,926
20,488
-6,583
-4,295
97,536
-39,864
57,672
2,141
0
-7,044
-44,767
149
-13,037
-33,515
-5,908
-3,369
-55,680
-2,911
12,616
9,706
2017
58,467
3,090
8,637
458
70,652
-35,000
35,652
8,556
-92,490
20,977
-97,956
0
96,440
-31,140
-5,177
-36,191
23,932
-3,372
12,108
8,735
2018E
67,121
-2,530
0
-6,004
58,587
-37,931
20,656
13,657
0
0
-24,274
0
5,244
-39,965
-5,339
0
-40,061
-5,749
9,543
3,794
2019E
68,817
180
0
-6,673
62,325
-33,190
29,135
13,822
0
23,040
3,672
0
-22,614
-39,047
-5,339
0
-67,001
-1,004
3,794
2,790
29 June 2017
6

Tata Power
NOTES
29 June 2017
7

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Tata Power
Analyst ownership of the stock
No
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Tata Power
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In respect of any matter arising from or in connection with the research you could contact the following representatives of Motilal Oswal Capital Markets Singapore Pte Limited:
Varun Kumar
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Contact : (+65) 68189232
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Motilal Oswal Securities Ltd
Motilal Oswal Tower, Level 9, Sayani Road, Prabhadevi, Mumbai 400 025
Phone: +91 22 3982 5500 E-mail: reports@motilaloswal.com
29 June 2017
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