Tata Power - Improving coal realizations.- Kotak Sec

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Tata Power (TPWR)
Utilities
Improving coal realizations. Tata Power (TPWR) reported a tepid performance in the
standalone power business, with lower generation from assets due to technical
hindrances in one of the power units. Consolidated earnings were supported by
revenues from the coal business, which grew 30% yoy despite a 10% yoy decline in
volumes. We continue to remain positive on the prospects of the coal business, and
maintain our ADD rating and target price of Rs1,420/share.

Lower demand for power in Mumbai distribution
TPWR reported standalone revenues of Rs15.7 bn, operating profit of Rs2.9 bn and net profit of
Rs2.2 bn in 2QFY11 compared to our estimate of Rs17.4 bn, Rs3.9 bn and Rs2.5 bn respectively.

Lower-than-estimated revenues were primarily on account of (1) lower sales in Mumbai LA (2,728
MU against our estimate of 2,905 MU), (2) lower cost of purchased power due to weakness in
short-term market (3) lower fuel cost duel to more gas based (instead of oil) generation in Mumbai
LA and (4) adjustment of Rs418 mn for income to be utilized in future tariff determination.
Reported PAT of Rs2.5 bn includes forex gains of Rs366 mn.
TPWR’s sale in Mumbai LA declined 19% sequentially while total gross generation declined by
16% primarily on account of lower PLFs at Unit 5 and 6. The management has indicated some
technical problems in Unit 5 while generation at Unit 6 was replaced by cheaper purchased power.

Strong coal realization compensate for weaker volumes
TPWR reported consolidated revenues of Rs47.9 bn, operating profit of Rs11.3 bn and PAT of
Rs4.2 bn in 2QFY11. Reported revenues include sale of non core investments of Rs1.9 bn adjusting
for which consolidated revenues were Rs46.1 bn (-11% qoq, 1% yoy). Standalone revenues of
Rs15.7 bn were augmented by (1) coal revenues of Rs14.7 bn, (2) revenues from NDPL of Rs11.8
bn and (3) revenue from power trading of Rs4.1 bn, respectively. Volumes in coal business
declined to 13.7 mn tons (-9% qoq, -11% yoy) primarily due to heavy rains in Indonesia that
affected mining activities in Kalimantan area. However, weak volumes were compensated by
strong realization of US$73.7/ton (16% qoq, 27% yoy) on back of strengthening prices of
imported coal.

Maintain ADD rating with a target price of Rs1,420/share
We maintain our ADD rating with a target price of Rs1,420/share. Our SOTP valuation comprises
four components—(1) value of operating power assets and projects nearing completion
(Rs571/share), (2) valuation of investments and cash in books equivalent to Rs399/share, (3)
projects under-implementation (Rs248/share) and (4) valuation of stake in coal mines in Indonesia
valued at Rs203/share.