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On account of weak Q2FY11 results, standoff with RInfra for 200MWs of power in Mumbai
License Area and general overhang on the power sector, Tata Power (TPW) stock has
underperformed the Sensex by 17% in YTD (FY11). However, outlook for the company remains
considerably positive on account of major capacity additions (2650MWs in FY12E), sustained
optimism in coal prices and robust performances of its distribution and transmission
businesses.
Maithon project gearing up: The first unit of 1050MW ‘Maithon’ thermal power project
is expected to commission in Q4FY11 and expected to start contributing fully to FY12
earnings. A 74:26 JV with Damodar Valley Corporation is complete to the extent of 90%
and once operational, will contribute Rs13.8bn to top‐line, Rs2bn to PAT and Rs3.5bn to
free cash flows annually.
Mundra UMPP on track: The first UMPP to come on‐stream in Mundra would be in
Q3FY12 (although efforts are made for an early commissioning) which has FSA with
Bumi’s KPC and Arutmin mines for 10.1mtpa (±20%). We expect full capacity generation
by FY14E which will contribute Rs33bn to the revenues.
Benefits (Bumi) from increasing coal prices: With coal volumes/realizations improving on
account of robust demand from Japan, China and India, TPW is expected to benefit as
Bumi plans to grow its production to 110mtpa by CY2012 from the current 60mtpa.
Valuations and Outlook: New projects are likely to double the generation capacity,
whereas the existing generation business may face some operational stress in the near
future. However, we expect this to be offset by the coal business which could witness a
transformed period of high growth aided by rising demand. Future growth prospects
(4000MWs) would still remain under veil partly on account of pending necessary
approvals for which we reduce our valuations. With 23% of the present generation
capacity (668 MWs) coming from clean energy, TPW aims to scale it up to 25% by 2017
(addition of 2500MWs). The company, on a consolidated basis, is trading at P/BV
multiple of 2.4x, 2.1x and 1.9x for FY11E, FY12E and FY13E, respectively with limited
downside risks. Acquisition of overseas coal assets for Coastal Maharashtra project and
outcome of Olympus deal would be a key development, going forward. Maintain
‘Accumulate’, with a revised target price of Rs1,430 (Previous TP ‐ Rs1,441).
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