Tata Power - Upstream value clouded by Mundra .:Macquarie Research

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Tata Power
Upstream value clouded by Mundra
Event
 TPWR reported headline NPAT of Rs20.9bn, above our estimate of Rs19.9bn
and the market at Rs19.1bn driven by a stronger EBIT contribution from coal,
while weaker merchant realisations at Haldia and Trombay pulled down
underlying earnings in the stand-alone business. After stripping away noncash
and one-off items, however, group NPAT appears to have slipped 3%
from FY10.
 TPWR has performed in-line with the market over the past six months. What
we like about TPWR is its undervalued coal assets which put it strategically
ahead of its peers and should drive earnings growth for the next two quarters.
It is clearly lagging other thermal producers due to the uncertainty over
Mundra UMPP profitability. With the stock trading 25% below valuation, we
maintain our Outperform – our preferred defensive large cap.
Impact
 Strong FY11 head-line result, but boosted by some one-offs… after
adjusting for some non-cash and one-off items (namely deferred stripping
costs and profit on sale of investments) FY11 NPAT appears 3% lower than
FY10 NPAT.
 FY12 an action packed year: with 1,050MW Maithon ~95% complete,
4,000MW Mundra 80% complete, 120MW Jojobera being commissioned in
March 2011 and anticipated coal production of 67mtpa (CY11) from the
KPC/Arutmin assets, TPWR is set for a year of strong operational growth.
 Platt’s reporting US$134-135/t settlement for Bumi: noting that some
Japanese Power Utilities have agreed to an FY12 settlement of US$134-135/t
for Bumi’s high-quality KPC coal – a premium to the Australian-Japanese
settlement of US$130/t given the freight differential.
 -Rs48/share (-4%) impact from repricing of fixed coal contract: company
management acknowledged on the conference call that they are in
discussions with the Indonesian Government regarding the fixed cost portion
(3mtpa) of its 10mtpa coal contract with Bumi. Management highlighted that
an adverse outcome could see Tata Power pay an additional US$35/t for the
3mtpa fixed component of the contract to FY17.
Earnings and target price revision
 FY14 NPAT +7% on the back of thermal coal upgrades.
Price catalyst
 12-month price target: Rs1,553.00 based on a Sum of Parts methodology.
 Catalyst: coal price settlements with Japanese buyers over next week and a
strong 1Q12 due to higher coal volumes/prices and merchant realisations.
Action and recommendation
 Outperform.