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M a r k e t l i n k e d I n d o n e s i a n c o a l , l i m i t e d i m p a c t
o n T a t a P o w e r …
As per media reports, the Indonesian government has passed a law that
coal contracts will be priced “retrospectively”. Earlier, in the Q4FY11
conference call, Tata Power did mention that coal sales will be
benchmarked as per international prices from September 2011 onwards.
What is new in this recent ruling is that pricing will be on a retrospective
basis.
While prima facie, it may appear that Tata Power (within our coverage
space) will be most affected, we interacted with Tata Power to get their
perspective.
The following were our key takeaways:
• The company’s annual requirement post full commissioning of
Mundhra UMPP would be ~ 10-12 MTPA
• Of this, 25% is on firm contract (~ 3 MT). The rest is based on
market rates
• According to the management, the rationale behind the
Indonesian government’s move would be to increase tax
collection on coal exports
• The company has made a representation to the government
stating that their investment is not trading/exporting coal but for
their captive purpose. Moreover, there is a possibility that taxes
paid would be benchmarked as per international coal prices while
coal prices will be fixed
• In case the government does not oblige, the management has
indicated at negotiations with Bumi Resources
Possible outcomes – worst case downside | 60/share (to our fair
valuation) from this ruling
Case 1: Coal prices to be benchmarked retrospectively as per Indonesian
government ruling.
Impact: Coal cost will increase by ~ $6/tonne. At $80/tonne, Mundhra
UMPP would be making losses. However, a ramp up in Bumi Resources
in CY13, (from ~ 67 MTPA in FY12 to ~ 88 MTPA in FY14) will save the
day. This is based on the assumption that an increase in coal cost (due to
the Indonesian government ruling) would not be a pass through.
If the increase in coal costs is a pass through, then we do not see a
downside in the Mundhra UMPP and maintain our valuation of | 60/share
for the Mundhra UMPP.
Our interaction with other private players suggests that a change in law
clause is present in every PPA. It is up to off takers (in this case various
SEBs) to allow a hike in tariff.
Exhibit 2: Details of Mundhra UMPP
Mundra UMPP
Configuration 5 units of 800 MW each
% ownership 100
Business Model Case 2 Bid driven
Fuel source Imported coal - Offtake agreement with PT Bumi Resources - for
11 Mtpa +/- 10%
GCV 5350
SHR 2050
Tariff Structure Gujarat (1805 MW), Maharashtra (760 MW), Punjab (475 MW),
Haryana (380 MW), Rajasthan (380 MW) - Levelised tariff of
|2.26 / kwhr
Project cost | 17000 crore (D/E: 75:25)
Amount Spent
( Q4 FY11)
Debt drawn –| 8134 crore, equity invested – | 3172 crore
Cost of Borrowing 9.35%
Aux. Consumption 6.00%
Source: Company, ICICIdirect.com Research
Case 2: Coal prices will be at fixed rates. The company to pay incremental
tax based coal
Impact: Realisation from Bumi Resources would decline by $5/tonne. We
see a decline in valuation for Bumi Resources to the extent of 10% to |
60/ share.
Case 3: The company goes for negotiation with Bumi Resources to
supply coal at lower prices.
Impact: We do not foresee this case, going forward, as (in FY14-15 – see
table below) Tata Power will be a net seller in the international market and
will not use all the coal from Bumi Resources for captive purposes.
V a l u a t i o n a n d v i e w
Since the current ruling is subject to change, we would wait for further
clarity and will not be revising our earnings estimates. At the CMP of |
1215, the stock is trading at a P/E of 12.2x and 11.2x on FY12E and FY13E
EPS, respectively. Similarly, on P/B multiple, the stock is trading at 1.9x
and 1.7x FY13E, respectively. A stable power business, upcoming power
projects, adequate fuel linkages and net long exposure to coal prices
makes us positive on the company. We maintain our target price of |
1383 on the stock. A key risk to our call is high cost of coal for Mundhra
and absence of rate hike in power tariffs in NDPL.
We see a valuation impact of |60/share (worst case scenario) for Mundhra
UMPP and Bumi Resources and ~| 30–35/share on account of no rate
hike in NDPL
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
M a r k e t l i n k e d I n d o n e s i a n c o a l , l i m i t e d i m p a c t
o n T a t a P o w e r …
As per media reports, the Indonesian government has passed a law that
coal contracts will be priced “retrospectively”. Earlier, in the Q4FY11
conference call, Tata Power did mention that coal sales will be
benchmarked as per international prices from September 2011 onwards.
What is new in this recent ruling is that pricing will be on a retrospective
basis.
While prima facie, it may appear that Tata Power (within our coverage
space) will be most affected, we interacted with Tata Power to get their
perspective.
The following were our key takeaways:
• The company’s annual requirement post full commissioning of
Mundhra UMPP would be ~ 10-12 MTPA
• Of this, 25% is on firm contract (~ 3 MT). The rest is based on
market rates
• According to the management, the rationale behind the
Indonesian government’s move would be to increase tax
collection on coal exports
• The company has made a representation to the government
stating that their investment is not trading/exporting coal but for
their captive purpose. Moreover, there is a possibility that taxes
paid would be benchmarked as per international coal prices while
coal prices will be fixed
• In case the government does not oblige, the management has
indicated at negotiations with Bumi Resources
Possible outcomes – worst case downside | 60/share (to our fair
valuation) from this ruling
Case 1: Coal prices to be benchmarked retrospectively as per Indonesian
government ruling.
Impact: Coal cost will increase by ~ $6/tonne. At $80/tonne, Mundhra
UMPP would be making losses. However, a ramp up in Bumi Resources
in CY13, (from ~ 67 MTPA in FY12 to ~ 88 MTPA in FY14) will save the
day. This is based on the assumption that an increase in coal cost (due to
the Indonesian government ruling) would not be a pass through.
If the increase in coal costs is a pass through, then we do not see a
downside in the Mundhra UMPP and maintain our valuation of | 60/share
for the Mundhra UMPP.
Our interaction with other private players suggests that a change in law
clause is present in every PPA. It is up to off takers (in this case various
SEBs) to allow a hike in tariff.
Exhibit 2: Details of Mundhra UMPP
Mundra UMPP
Configuration 5 units of 800 MW each
% ownership 100
Business Model Case 2 Bid driven
Fuel source Imported coal - Offtake agreement with PT Bumi Resources - for
11 Mtpa +/- 10%
GCV 5350
SHR 2050
Tariff Structure Gujarat (1805 MW), Maharashtra (760 MW), Punjab (475 MW),
Haryana (380 MW), Rajasthan (380 MW) - Levelised tariff of
|2.26 / kwhr
Project cost | 17000 crore (D/E: 75:25)
Amount Spent
( Q4 FY11)
Debt drawn –| 8134 crore, equity invested – | 3172 crore
Cost of Borrowing 9.35%
Aux. Consumption 6.00%
Source: Company, ICICIdirect.com Research
Case 2: Coal prices will be at fixed rates. The company to pay incremental
tax based coal
Impact: Realisation from Bumi Resources would decline by $5/tonne. We
see a decline in valuation for Bumi Resources to the extent of 10% to |
60/ share.
Case 3: The company goes for negotiation with Bumi Resources to
supply coal at lower prices.
Impact: We do not foresee this case, going forward, as (in FY14-15 – see
table below) Tata Power will be a net seller in the international market and
will not use all the coal from Bumi Resources for captive purposes.
V a l u a t i o n a n d v i e w
Since the current ruling is subject to change, we would wait for further
clarity and will not be revising our earnings estimates. At the CMP of |
1215, the stock is trading at a P/E of 12.2x and 11.2x on FY12E and FY13E
EPS, respectively. Similarly, on P/B multiple, the stock is trading at 1.9x
and 1.7x FY13E, respectively. A stable power business, upcoming power
projects, adequate fuel linkages and net long exposure to coal prices
makes us positive on the company. We maintain our target price of |
1383 on the stock. A key risk to our call is high cost of coal for Mundhra
and absence of rate hike in power tariffs in NDPL.
We see a valuation impact of |60/share (worst case scenario) for Mundhra
UMPP and Bumi Resources and ~| 30–35/share on account of no rate
hike in NDPL
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