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Commodity earnings drive medium term profitability
FY12 to be an inflexion point, possibly the peak year of earnings until FY14
FY12 will be an inflexion point for Tata Power, due to the (1) commissioning of the first
unit of the Mundra UMPP, (2) 1GW of the Maithon project becoming operational in phases,
providing merchant upsides (as PPA starts from FY13), and (3) greater visibility on KPC/
Arutmin Mines production ramp-up and continued robust realizations. However, FY12
could also be Tata Power's peak year of earnings in the medium term, given (1) increasing
losses from Mundra UMPP, (2) one-time merchant gains from the Maithon project, and (3)
no new visibile capacity addition before FY16, as most projects are in the initial stages of
development. Re-negotation of fixed price contract for coal supply with KPC/Arutmin
Mines remains a key variable to watch for in the near term. We maintain Neutral.
Commodity earnings to drive medium-term profitability
Over FY11-13, we expect Tata Power's consolidated earnings to increase from Rs19.4b
in FY11 to Rs25.3b in FY13 (CAGR of 14%). However, commodity earnings will drive
a very meaningful part of the increase, as Tata Power is net long on coal by 19-20mt
a year. The contribution of commodity earnings to consolidated profitability increased
from 9% in FY08 to 44% in FY11, and we expect this to increase to 59% in FY13.
Mundra UMPP commissioning to impact profitability from FY13
Given the competitive tariff bid and increasing prices of imported coal (from US$35-40/
ton in 2007 to US$70-75/ton currently), we expect Mundra UMPP to post meaningful
losses. Year-1 quoted tariff is Rs1.9/unit and given permissible escalations, we estimate
applicable tariff of Rs2.3/unit, resulting in annual losses of ~Rs6b on full commissioning
in FY14. After it commissions the Mundra UMPP the profitability of the chain (coal
mining + Mundra UMPP) will decline from Rs13.6b in FY12 to Rs10.6b in FY14.
Projects under construction largely have regulated/controlled returns
We expect Tata Power to commission 5.1GW capacity until FY14, including the
Mundra UMPP (4GW) and Maithon (1GW), where offtake has been tied up. Tata
Power's merchant capacity is 200MW (commissioned); ~600MW from its Maithon
project will also be available for merchant sale in FY12 (as the PPA is effective from
April 2012). The incremental project pipeline is 6.9GW, of which 1.3GW is based on
captive mines. For other capacities, fuel sourcing has yet to be tied up.
Valuation and view
We expect Tata Power to post consolidated PAT of Rs27.2b in FY12 (up 40%). Our
SOTP-based target price is Rs1,272, comprising Rs527/share for Mumbai distribution
(DCF, WACC of 10.5%), Rs80/share for Delhi distribution (15x FY12E PER), defense
business Rs14/share (15x FY12E EV/EBIDTA), Rs10/share Tata BP Solar Rs40/
share (20x FY12E PER), Powerlinks Transmission Rs14/share (1.4x FY12E P/BV),
investment Rs236/share (BV or market price, with 25% holdco discount), Mundra
UMPP + mining JVs at Rs320/share (DCF), Maithon project at Rs78/share, projects
under development at Rs80/share and net debt of Rs122/share. Indonesian regulations
specify mineral exports at reference prices and strict implementation could possibly
impact earnings by Rs3b a year (~3mt to be procured at fixed prices). We maintain
our Neutral recommendation.
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