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Tata Power (TPWR)
Utilities
Coal continues to drive earnings growth. Tata Power (TPWR) reported a 25% yoy
growth in consolidated earnings led by strong 33% yoy growth in coal revenues that
compensated for the modest performance of the power business. The growth in the
coal business was primarily driven by higher realizations. We continue to remain positive
on the prospects of the coal business, and maintain our ADD rating with a revised
target price of Rs1,415/share (Rs1,420 previously).
Lower power sales in Mumbai and declining merchant tariffs
TPWR reported standalone revenues of Rs16 bn (4% yoy, 2% qoq), operating profit of Rs2.8 bn (-
15% yoy, -3% qoq) and net profit of Rs1.5 bn (14% yoy, -32% qoq) in 3QFY11 compared to our
estimate of Rs17.8 bn, Rs3.6 bn and Rs2 bn, respectively. Lower-than-estimated revenues were
primarily on account of (1) lower sales in Mumbai LA (2,640 MU against our estimate of 3,000
MU), and (2) sequential decline in merchant realizations—Rs3.7/kwh in 3QFY11. Lower fuel cost
(Rs2.38/kwh against our estimate of Rs2.52/kwh) was due to the shift in generation mix in favor of
gas-based generation (instead of oil) in Mumbai LA. We discuss the standalone results in more
detail in the subsequent section.
Strong coal realization compensate for weak volumes in coal business
TPWR reported consolidated revenues of Rs44.1 bn (2% yoy, -8% qoq), operating profit of Rs10.3
bn (23% yoy, -9% qoq) and PAT of Rs4.1 bn (25% yoy, -9% qoq) in 3QFY11. Standalone
revenues of Rs16 bn were augmented by (1) coal revenues of Rs16.7 bn, (2) revenues from NDPL
of Rs7.9 bn and (3) revenue from power trading of Rs2.5 bn, respectively. Volumes in coal
business were impacted due to heavy rains in Indonesia resulting in ~6% yoy decline. However,
weak volumes were compensated by strong average realization of US$73/ton (25% yoy) on back
of surge in global coal prices. NDPL revenues and PAT declined to Rs7.9 bn (-5% yoy, -33% qoq)
and Rs348 mn (-49% yoy, -53% qoq) primarily due to lower incentives on stiff AT&C reduction
targets. We discuss key highlights of consolidated performance in the subsequent section.
Maintain ADD rating with a revised target price of Rs1,415/share
We maintain our ADD rating with a revised target price of Rs1,415/share (Rs1,420/share
previously). Our SOTP valuation comprises four components—(1) value of operating power assets
and projects nearing completion (Rs537/share), (2) valuation of investments and cash in books
equivalent to Rs373/share, (3) projects under-implementation (Rs274/share) and (4) valuation of
stake in coal mines in Indonesia valued at Rs231/share.
Analysis of standalone results
We highlight below some key details of 3QFY11 standalone results
TPWR’s gross generation was 3,713 MU (-4% yoy, 0.5% qoq) while total unit sales
was 3,824 MU (3% yoy, -3% qoq). Generation in Mumbai license area was down -
10% yoy primarily due to lower generation from high cost Unit 6 on account of
cheaper power available for purchase. Total sales in Mumbai area declined to 2,640
MU (-3% qoq, 0.5% yoy).
During the quarter, quantum of purchased power remained stable at 363 MU as
against 377 MU in 2QFY11. However, due to higher per unit cost of Rs4.8/kwh,
overall cost of purchased power increased from Rs1.6 bn in 1QFY11 to Rs1.7 bn in
2QFY11.
TPWR sold 353 MU in short-term market at an average realization of Rs3.7/kwh. This
included 142 MU from Unit 8 at an average realization of ~Rs5/kwh and 211 MU from
Haldia at average realization of ~Rs3/kwh.
Effective tax rate declined from 19.4% in 2QFY11 to 15% in 2QFY11 due to (1) nontaxable
dividend income during the quarter and (2) lower deferred tax.
Employee cost increased significantly to Rs1 bn (29% yoy, 44% qoq) primarily on
account of revision in salaries during the quarter.
Average fuel cost declined to Rs2.38/kwh (-4% qoq, -7% yoy) on account of change
in fuel mix with more gas based generation (instead of oil) in Mumbai LA.
Analysis of consolidated results
Volumes in coal business declined 6% yoy to 16 mn tons impacted by heavy rains in
Indonesia. However, weak volumes were compensated by strong realization of
~US$73/ton (25% yoy) driven by surge in global coal prices.
Cash cost of production increased to US$37/ton in 3QFY11 from US$31/ton in
3QFY10 on account of higher demurrage payments to ships and inflation in crude oil
prices. Management has guided for cash cost of US$34/ton in FY2012E subject to
stability in crude prices.
We highlight that a sharp yearly increase in EBIT margins in coal business (12% in
3QFY10, 26% in 3QFY11) is primarily on account of (1) better realization which has
been partially offset by higher cash cost and (2) deferred stripping cost of Rs3.7 bn
charged in 3QFY10 as against a capitalization of Rs714 mn in 3QFY11.
Power revenues declined from Rs29.9 bn in 2QFY11 to Rs26 bn in 3QFY11 primarily
due to (2) decline in standalone revenues and (2) lower revenue contribution from
NDPL on reduction in performance incentives. NDPL revenues and PAT declined to
Rs7.9 bn (-5% yoy, -33% qoq) and Rs348 mn (-49% yoy, -53% qoq) due to the
above mentioned reason.
A 12% sequential decline in other expenses was primarily due to provisioning of
Rs880 mn for diminution in value of investment in Australian company Geodynamics
done in 2QFY11.
Consolidated PAT includes a forex gain of Rs320 mn primarily on account of gain of
Rs260 mn in CGPL (Mundra project) due to realignment of foreign exchange liabilities.
Coal business – termination of Olympus deal positive
TPWR, in July 2010, announced its plans to divest 15% ownership in the coal mining
SPV’s to Olympus Capital for a consideration of US$300 mn (Rs14 bn), implying a value
of US$2 bn for the ownership in the SPV’s which together own 30% economic interest
in KPC and Arutmin coal mines (units of Bumi Resources). The deal has now been
terminated on grounds of certain condition precedent not being fulfilled. We have
maintained that the deal was not value accretive for TPWR (refer our note dated July 2,
2010 – ‘Sale of stake in Indonesian mines’) and see the termination of deal as positive for
Tata Power and accordingly adjust our valuations to reflect the same.
Satisfactory progress on under-construction projects
TPWR plans to achieve capacity additions of 5.2 GW by FY2013E comprising 4 GW at
Mundra, 1 GW at Maithon and 120 MW at Jojobera Unit 5 which would take its total
installed capacity to 8.2 GW by end FY2013E. TWPR also has another 5.3 GW under
various stages of planning. We highlight below the status of under-construction projects
of TPWR.
Mundra project (4000 MW) is 72% complete and TPWR has incurred a capex of
Rs87.5 bn (Rs29.4 bn invested as equity) as of September 2010 out of the total project
cost of Rs170 bn. We note that1st unit is expected to be commissioned by September
2011.
Maithon project (1050 MW) is 92% complete and synchronization of first unit is
expected in February 2011. TPWR has invested Rs9.4 bn equity as of September 2010
into the project. For Unit I, TPWR has already signed an FSA with BCCL while unit II
has a linkage with CCL. In order to supplement coal supplied from CIL, TPWR has also
entered into a supply agreement with Tata Steel for supply of ~1 mtpa.
IEL, Unit 5 (120 MW) – Unit was synchronized in January 2011 and commercial
operation is expected to commence by end FY2011E.
Our valuation for TPWR does not include the pipeline projects as we these projects are
yet to tie up necessary inputs. Exhibit 5 below highlights TPWR’s project profile while
Exhibit 4 details the execution status of pipeline projects.
India Equity Research Reports, IPO and Stock News
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Tata Power (TPWR)
Utilities
Coal continues to drive earnings growth. Tata Power (TPWR) reported a 25% yoy
growth in consolidated earnings led by strong 33% yoy growth in coal revenues that
compensated for the modest performance of the power business. The growth in the
coal business was primarily driven by higher realizations. We continue to remain positive
on the prospects of the coal business, and maintain our ADD rating with a revised
target price of Rs1,415/share (Rs1,420 previously).
Lower power sales in Mumbai and declining merchant tariffs
TPWR reported standalone revenues of Rs16 bn (4% yoy, 2% qoq), operating profit of Rs2.8 bn (-
15% yoy, -3% qoq) and net profit of Rs1.5 bn (14% yoy, -32% qoq) in 3QFY11 compared to our
estimate of Rs17.8 bn, Rs3.6 bn and Rs2 bn, respectively. Lower-than-estimated revenues were
primarily on account of (1) lower sales in Mumbai LA (2,640 MU against our estimate of 3,000
MU), and (2) sequential decline in merchant realizations—Rs3.7/kwh in 3QFY11. Lower fuel cost
(Rs2.38/kwh against our estimate of Rs2.52/kwh) was due to the shift in generation mix in favor of
gas-based generation (instead of oil) in Mumbai LA. We discuss the standalone results in more
detail in the subsequent section.
Strong coal realization compensate for weak volumes in coal business
TPWR reported consolidated revenues of Rs44.1 bn (2% yoy, -8% qoq), operating profit of Rs10.3
bn (23% yoy, -9% qoq) and PAT of Rs4.1 bn (25% yoy, -9% qoq) in 3QFY11. Standalone
revenues of Rs16 bn were augmented by (1) coal revenues of Rs16.7 bn, (2) revenues from NDPL
of Rs7.9 bn and (3) revenue from power trading of Rs2.5 bn, respectively. Volumes in coal
business were impacted due to heavy rains in Indonesia resulting in ~6% yoy decline. However,
weak volumes were compensated by strong average realization of US$73/ton (25% yoy) on back
of surge in global coal prices. NDPL revenues and PAT declined to Rs7.9 bn (-5% yoy, -33% qoq)
and Rs348 mn (-49% yoy, -53% qoq) primarily due to lower incentives on stiff AT&C reduction
targets. We discuss key highlights of consolidated performance in the subsequent section.
Maintain ADD rating with a revised target price of Rs1,415/share
We maintain our ADD rating with a revised target price of Rs1,415/share (Rs1,420/share
previously). Our SOTP valuation comprises four components—(1) value of operating power assets
and projects nearing completion (Rs537/share), (2) valuation of investments and cash in books
equivalent to Rs373/share, (3) projects under-implementation (Rs274/share) and (4) valuation of
stake in coal mines in Indonesia valued at Rs231/share.
Analysis of standalone results
We highlight below some key details of 3QFY11 standalone results
TPWR’s gross generation was 3,713 MU (-4% yoy, 0.5% qoq) while total unit sales
was 3,824 MU (3% yoy, -3% qoq). Generation in Mumbai license area was down -
10% yoy primarily due to lower generation from high cost Unit 6 on account of
cheaper power available for purchase. Total sales in Mumbai area declined to 2,640
MU (-3% qoq, 0.5% yoy).
During the quarter, quantum of purchased power remained stable at 363 MU as
against 377 MU in 2QFY11. However, due to higher per unit cost of Rs4.8/kwh,
overall cost of purchased power increased from Rs1.6 bn in 1QFY11 to Rs1.7 bn in
2QFY11.
TPWR sold 353 MU in short-term market at an average realization of Rs3.7/kwh. This
included 142 MU from Unit 8 at an average realization of ~Rs5/kwh and 211 MU from
Haldia at average realization of ~Rs3/kwh.
Effective tax rate declined from 19.4% in 2QFY11 to 15% in 2QFY11 due to (1) nontaxable
dividend income during the quarter and (2) lower deferred tax.
Employee cost increased significantly to Rs1 bn (29% yoy, 44% qoq) primarily on
account of revision in salaries during the quarter.
Average fuel cost declined to Rs2.38/kwh (-4% qoq, -7% yoy) on account of change
in fuel mix with more gas based generation (instead of oil) in Mumbai LA.
Analysis of consolidated results
Volumes in coal business declined 6% yoy to 16 mn tons impacted by heavy rains in
Indonesia. However, weak volumes were compensated by strong realization of
~US$73/ton (25% yoy) driven by surge in global coal prices.
Cash cost of production increased to US$37/ton in 3QFY11 from US$31/ton in
3QFY10 on account of higher demurrage payments to ships and inflation in crude oil
prices. Management has guided for cash cost of US$34/ton in FY2012E subject to
stability in crude prices.
We highlight that a sharp yearly increase in EBIT margins in coal business (12% in
3QFY10, 26% in 3QFY11) is primarily on account of (1) better realization which has
been partially offset by higher cash cost and (2) deferred stripping cost of Rs3.7 bn
charged in 3QFY10 as against a capitalization of Rs714 mn in 3QFY11.
Power revenues declined from Rs29.9 bn in 2QFY11 to Rs26 bn in 3QFY11 primarily
due to (2) decline in standalone revenues and (2) lower revenue contribution from
NDPL on reduction in performance incentives. NDPL revenues and PAT declined to
Rs7.9 bn (-5% yoy, -33% qoq) and Rs348 mn (-49% yoy, -53% qoq) due to the
above mentioned reason.
A 12% sequential decline in other expenses was primarily due to provisioning of
Rs880 mn for diminution in value of investment in Australian company Geodynamics
done in 2QFY11.
Consolidated PAT includes a forex gain of Rs320 mn primarily on account of gain of
Rs260 mn in CGPL (Mundra project) due to realignment of foreign exchange liabilities.
Coal business – termination of Olympus deal positive
TPWR, in July 2010, announced its plans to divest 15% ownership in the coal mining
SPV’s to Olympus Capital for a consideration of US$300 mn (Rs14 bn), implying a value
of US$2 bn for the ownership in the SPV’s which together own 30% economic interest
in KPC and Arutmin coal mines (units of Bumi Resources). The deal has now been
terminated on grounds of certain condition precedent not being fulfilled. We have
maintained that the deal was not value accretive for TPWR (refer our note dated July 2,
2010 – ‘Sale of stake in Indonesian mines’) and see the termination of deal as positive for
Tata Power and accordingly adjust our valuations to reflect the same.
Satisfactory progress on under-construction projects
TPWR plans to achieve capacity additions of 5.2 GW by FY2013E comprising 4 GW at
Mundra, 1 GW at Maithon and 120 MW at Jojobera Unit 5 which would take its total
installed capacity to 8.2 GW by end FY2013E. TWPR also has another 5.3 GW under
various stages of planning. We highlight below the status of under-construction projects
of TPWR.
Mundra project (4000 MW) is 72% complete and TPWR has incurred a capex of
Rs87.5 bn (Rs29.4 bn invested as equity) as of September 2010 out of the total project
cost of Rs170 bn. We note that1st unit is expected to be commissioned by September
2011.
Maithon project (1050 MW) is 92% complete and synchronization of first unit is
expected in February 2011. TPWR has invested Rs9.4 bn equity as of September 2010
into the project. For Unit I, TPWR has already signed an FSA with BCCL while unit II
has a linkage with CCL. In order to supplement coal supplied from CIL, TPWR has also
entered into a supply agreement with Tata Steel for supply of ~1 mtpa.
IEL, Unit 5 (120 MW) – Unit was synchronized in January 2011 and commercial
operation is expected to commence by end FY2011E.
Our valuation for TPWR does not include the pipeline projects as we these projects are
yet to tie up necessary inputs. Exhibit 5 below highlights TPWR’s project profile while
Exhibit 4 details the execution status of pipeline projects.
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