29 June 2017
Update | Sector: Utilities
TP: INR68 (-17%)
Challenges remain, Trombay Unit-6 PPA at risk
We met Tata Power’s (TPWR) management and visited its Trombay power plant.
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:
project can potentially save from opportunistic coal sourcing and earn
additional revenue via sale of power from uncommitted PLF (if regulator
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
TPWR has slowed investment in renewables due to intense competition:
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).
(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):
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.
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 (%)
91 / 67
Financials Snapshot (INR b)
2017 2018E 2019E
EPS Gr. (%)
BV/Sh. (INR )
Shareholding pattern (%)
Mar-17 Dec-16 Mar-16
FII Includes depository receipts
Stock Performance (1-year)
Tata Power Co.
Sensex - Rebased
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@MotilalOswal.com); +91 22 6129 1549
(SanjayJain@MotilalOswal.com); +91 22 6129 1523