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Tata Power
Rs1,386.70 - BUY
Upgrade earnings
We are upgrading the FY12-13 earnings for Tata Power by c.35% to
factor in higher coal realization for the Indonesian mines given the recent
upgrade in estimates for thermal coal by our resources team. This has
lead to lower value for Mundra UMPP as a part of its coal requirements
are indexed to the market price. Our target price now stands at
Rs1,600/sh which implies 15% upside. Tata Power remains our preferred
pick in the Indian utility space given its low exposure to linkages from
Coal India, net long position on coal and very small merchant portfolio.
Coal prices continue to trend upwards
BJI Index crossed US$130/t on 6th January – the highest since October 2008.
With the floods situation in Queensland still severe there could be more near
term pressure on the coal prices. Our resources team has very bullish view on
thermal coal prices (see Craving for Coal) and have upgraded the FY12 and
FY13 estimates for the benchmark coal by 5-20%.
c.35% earnings upgrade for consolidated earnings
We are upgrading Tata Power’s consolidating earnings by c.35% for FY12-13
incorporating higher realization for the coal mines in Indonesia (US$88/t for
FY12 and US$83/t for FY13) and the impact on Mundra UMPP based on
increased coal prices. Our SOTP based target price is now Rs1,600 (Rs468 for
the power business; Rs766 for coal mines; Rs7 for Mundra + Maithon and
Rs352 is the value of investments) which implies 15% upside from current
levels.
The first unit of Maithon (1,050MW coal based project) is expected to
commission in 4QFY11 and the second unit by 1QFY12. Mundra UMPP’s
(4,000MW project) first unit of 800MW is expected to commission by
September 2011. The progress on pipeline projects Tubed, Naraj Marthapur
and Derhand could add to the value of power business going ahead.
Tata Power best placed to manage coal and merchant tariff risk
We expect FY12 to be a difficult year for the coal based power utilities given
the constraints in domestic coal production (please see “The upcoming coal
crunch…”) and the rising price of the spot thermal coal. This coupled with
falling merchant tariffs would impact the utilities with PPAs with no “pass
through” of fuel cost and higher exposure to short term market. Tata Power
scores well on both these parameters with its very low dependence on coal
linkages from Coal India, very small merchant portfolio and net long position
on coal. It continues to be our preferred pick in the space.
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