Credit Suisse:: Tata Power -3Q11 marginally below estimates – impacted by lower coal sales, higher coal cash production cost

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Tata Power Ltd------------------------------------------------------------------------Maintain NEUTRAL 
3Q11 marginally below estimates – impacted by lower coal sales, higher coal cash production cost


● Tata Power’s 3Q FY11 consolidated recurring PAT at Rs4.1 bn
declined 14% YoY (7% below estimates). Disappointment was
mainly led by its coal business as coal sales declined 6% YoY and
cash production costs increased 20% YoY, impacted on account
of high oil prices and heavy monsoons in Indonesia.
● Standalone recurring PAT at Rs1.3 bn declined 4% YoY mainly on
account of lower-than-expected merchant tariff at Rs3.7/kWh
versus industry average of Rs4/kWh. However, merchant sales at
353 mn kWh (up 79% YoY) was 5% ahead of our estimates.
● Tata Power would continue to provide 200 MW power from its
generation projects in Mumbai to Reliance Infra’s distribution
business until Mar 2011. Tata Power expects this power to be
freed from April 2011 but would be used for the increasing needs
of its growing Mumbai distribution customer base now over 0.1mn.
● We cut FY11E EPS by 12.6% on lack of 0.2GW merchant sales and
high coal cash costs. We raise FY12/13E EPS by 7%/ 3% led by
merchant sales from Maithon and higher coal realisation. We raise
our target price to Rs1,341 (from Rs1,241). Maintain NEUTRAL.
Standalone PAT marginally below estimates
Standalone recurring PAT at Rs1.3 bn declined 4% YoY mainly on
account of: 1) lower-than-expected merchant tariff at Rs3.7/kWh
during the quarter versus our estimate of Rs4/kWh (in line with the
industry average) and 2) lower offtake by Karnataka from Belgaum
project. However, merchant sales increased 79% YoY to 353mn kWh,
5% higher than our estimates.


Consolidated PAT 7% below estimates mainly led by weak
performance at coal business
Tata Power’s 3Q FY11 consolidated recurring PAT at Rs4.1 bn
declined 14% YoY and was about 7% below our estimates. The
disappointment was mainly led by weaker-than-expected profitability
at its coal business on account of: 1) 6% YoY fall in coal sales and 2)
20% YoY increase in its cash cost of production. Tata Power
highlighted in the post results conference call that production was
mainly impacted due to monsoons during the quarter in Indonesia.
Cash production costs has mainly increased on rising cost of oil
(diesel used in coal generation) and higher demurrage costs impacted
on account of monsoons


Tata Power expects coal production at its Indonesian mines to
increase to 70 mt during FY11 versus 60 mt during FY10 and cash
cost to reduce to US$34/tn led by operating gains from higher
production, assuming that the oil prices sustains at Nov 2010 levels.


Cut FY11E EPS by 12.6%, raise FY12-13 EPS by 3-7%; raise
TP to Rs1,341, maintain NEUTRAL
We cut our FY11E EPS by 12.6% as we factor in lower 3Q results,
lack of merchant sales opportunity from 0.2 GW capacity to be sold to
RInfra’s distribution business at regulated tariff and higher cash
production costs for its coal business. However, we raise our
FY12/13E EPS by 7%/3% despite our assumption of higher cash
production costs at coal business, as we factor in the potential
merchant sales from Maithon project during FY12 (PPA effective from
FY13) and higher coal realisation at US$80/tn. Consequently, we
raise our target price to Rs1,341 (from Rs1,241). We expect
generation projects under implementation to take time to provide
visibility/ upside. We believe the stock is almost fairly priced in the
meanwhile. Maintain NEUTRAL.