JPMorgan, Tata Power :: Factoring in a favorable outlook for coal mines: Maintain OW

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Tata Power
Overweight
TTPW.BO, TPWR IN
Factoring in a favorable outlook for coal mines:
Maintain OW


• Potential coal beta, maintain OW: Over the past 3 months, TPWR has
outperformed the Sensex by 8%. Being the only IPP net-long on imported
coal, we expect the outperformance to continue as (a) coal prices are likely
to remain strong, (b) LT contracts in Indonesian coal mines are expected to
reset to higher prices. Over 9MFY11 coal realizations have already
improved ~30% to US$76/MT and (c) the increase in realizations is
accompanied by improvements at operating level in coming quarters.
EBIT/MT has remained stable at ~US$20/MT over past 3 quarters.

• More positive on long term coal price realization and operating
margins. We have revisited our coal mine model and incorporated the
following adjustments- (a) KPC & Arutmin coal mine volumes of ~63MMT
in CY11 increasing to 115MMT by CY18 in line with estimates of our
Bumi analyst, Stevanus Juanda, (b) Net sales realizations of US$85-90 over
the next 5 years, and (c) Pick up in EBIT to ~US$24/MT in CY11,
increasing to US$32 by CY18. Our estimates continue to reflect our
skepticism on Bumi’s ability to rein in production costs, with rising fuel
cost and deteriorating stripping ratio. Our FY12 consol EPS estimates are
up 7.5% and coal mine valuations is up ~12% to Rs675/share.
• Project status and IPP view: Mundra UMPP Unit-I (800MW) is on track
for Sep-11. Maithon Unit-I of 525MW is delayed and CoD is expected in
May-11 and Unit-II 3-4 months hence. Our valuation of Maithon is down
6.5% to Rs114/share. Also, given our concerns on IPP space on execution
and fuel availability issues, we now take 50% haircut on the value attributed
to TPWR’s 1000MW under-development at Orissa (cut of Rs60/share).
• Our revised Mar-12 SOP PT of Rs1500 (from Rs1490) incorporates the
positive view on coal mines. The stock is trading at 1.9x FY12E BV, slightly
below NTPC (2.0x), though TPWR’s recent execution track record has been
better. Key downside risk to PT includes delays in securing clearances for
under development Orissa projects which account for ~4% of our PT, and
inability to realize value for telecom investments (9.5% of SOP)