Tata Power - Keeping more of the gem:: Macquarie

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Tata Power
Keeping more of the gem
Event
 The transaction in which TPWR would sell 14-15% of its stake in the
KPC/Arutmin coal asset to Olympus Capital will not proceed due to „certain
conditions‟ not being met. This is clearly a positive for TPWR in our view as
the stake was being sold at a 23% discount to our valuation.

 We also note that thermal coal prices have risen over 20% in the past two
months. A 10% rise in thermal prices increases our TPWR FY12 NPAT by
9%. Having materially underperformed other regional coal plays over the past
few months, current prices offer a buying opportunity with a shorter-term view.
Impact
 Why is it not going ahead?: TPWR‟s press announcement was vague,
highlighting that „certain conditions precedent as specified in the Investment
Agreement‟ were not met by a specific date. We had previously understood
that challenges regarding regulatory approvals were being faced.
 Deal undervalued KPC/Arutmin: In our view, the US$300m asset sale was
favourable to Olympus Capital, with the implied enterprise value of the assets
at US$2.4bn vs our valuation of US$3.1bn. Therefore, the deal not
proceeding is a clear positive for TPWR, in our opinion.
 Coal price a near-term catalyst: Now that the deal isn‟t going ahead,
TPWR‟s net long position to thermal coal prices will increase from 18mtpa to
around 19-23mtpa over the next 7 yrs. If thermal coal prices exceed
consensus forecasts by ~20%, we expect FY12 NPAT estimates to increase
by ~20%. Currently, spot thermal prices are 17% above our FY12 contract
price forecast.
 A better macro environment to sell a passive stake: Even if TPWR
continues to look for a buyer to divest some of its stake in KPC/Arutmin, the
macro environment has improved significantly with thermal spot coal prices up
>60% from the time the deal pricing was agreed, while the domestic coal
supply scenario among Indian IPPs has been getting worse.
Earnings and target price revision
 No change – we await further clarity from the company.

Price catalyst
 12-month price target: Rs1,627.00 based on a Sum of Parts methodology.
 Catalyst: thermal coal price strength over the next few months.
Action and recommendation
 The stock trades at a 19% discount to our target price and at 13.3x FY12E
and 11.6x FY13E earnings, which appears attractive in our view. Having
materially underperformed other regional coal plays by ~40% over the past
three months, we think current prices offer a buying opportunity with a shorterterm
view.