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Tata Power
Bumi’s cheers (1H12) vs Mundra’s tears (2H12)
Event
Macquarie has increased its thermal benchmark coal price forecasts for FY12
by 38% from US$105/t to US$145/t and for FY13 by 20% from US$100/t to
US$120/t. At the same time we have remodelled the Mundra asset post
transfer of coverage, which ups our FY12E EPS by ~6% (20% ahead of the
street) but drags our FY13E EPS down by ~20% (10% below the street).
The stock has outperformed the market by 9% over the past month and has
been the best performer among power utilities over the past three months. We
retain our Outperform position on the stock as we still expect consensus
upgrades driven by higher coal price realisations in 1H12. The challenge for
TPWR will be to retain earnings momentum in 2H12 following the
commissioning of the 4000MW Mundra UMPP, while coal prices are likely
retrace some its gains when supply pressures dissipate.
Thermal coal price forecast up 38% and 20% in FY12 and FY13 to
US$138/t and US$120/t respectively. Risks to pricing in the short term are
skewed to the upside given the severe problems with supply, while we feel
comfortable that Indian demand will continue to rise, while the fundamentals
of the Chinese market could turn positive very quickly heading into mid-2011.
Bumi asset will prove its worth: As we noted in our piece on Keeping more
of the gem (4 Jan 2011), we view the cessation of the Olympus deal as
positive for TPWR, with the asset driving earnings growth and value.
Following our coal price upgrades, we increase the Bumi EBITDA by 24% in
CY12E and 22% in CY13E.
New Mundra forecasts bring down earnings like a big kid on a see-saw:
The FY12 benefits from our coal price upgrades have mostly been offset by
our remodelled Mundra forecasts, built from a bottom-up methodology,
escalating the tariff from their real rates set in April 2007. However, our FY13
earnings forecasts have been brought down by ~20%.
Earnings and target price revision
We lowered our FY13E NPAT by ~20% and revise our price target down from
Rs1,627 to Rs1,553.
Price catalyst
12-month price target: Rs1,553.00 based on a Sum of Parts methodology.
Catalyst: Thermal benchmark coal price settlement over next three months.
Action and recommendation
The strong performance of thermal coal prices has added a material catalyst
to TPWR’s FY12E earnings. We retain our Outperform position on the stock
as we still expect consensus upgrades driven by higher coal prices realised in
FY12. However we’ll be more cautious as we approach 2H12 due to Mundra.
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