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Tata Power (TPWR.BO): Maintain Buy
What happened
We reiterate our Buy rating on Tata Power and our 12-month SOTPbased
target price of Rs1436, implying potential upside of about 40%.
Our positive view is based on two key factors:
1. Projects in pipeline not valued into share price: Tata Power
corrected by 24% YTD (underperformed Sensex by 7%). On our
calculations, the correction implies no value for the projects in the
pipeline. We believe the market will start assigning value for those
projects on completion of pre-construction activities.
Even if we were to remove the value of future projects (we estimate
Rs166/share) from our SOTP methodology, we believe the stock would
still be attractive, potentially offering more than 20% yield. We have
included the value of the future projects as there is no uncertainty on
fuel supplies.
We believe current prices imply most of the downside risks from
Mundra project. Any positive news, either in the form of tariff revisions
by beneficiaries of Mundra Project or successful implementation of
using low grade coal, would have a positive impact on the stock.
2. Existing business offers downside protection: With most of the
generation (except Mundra) and distribution assets operating under a
regulated mechanism, we see relatively lower risks for its existing
business. Tata Power earnings and valuation have very low sensitivity to
changes in fuel prices, utilization rates and short-term rates.
Also, with the commissioning of Mundra project, we think its earnings
cyclicality would lessen as falling international coal prices would benefit
the project and vice versa. Although Tata Power has high earnings
sensitivity to coal prices, we believe the impact on valuation would be
limited as Tata Power has significantly underperformed the Indonesian
coal equities from the start of 2011 (Exhibits 34 & 35). A drop in
international coal prices should have a limited impact on its stock price.
Valuation:
We reiterate our Buy rating with a 12-month SOTP-based target price of
Rs1436, implying upside potential of 40%. We value the coal business at
6x FY12E EV/EBITDA.
Key Risks:
The following are three key downsides risks: 1) disclosures during the
2Q results season that suggest greater-than-anticipated losses arising
from Mundra; 2) news flow indicating that Tata Power distribution arms
will be asked by the respective state governments to absorb some
portion of the under-recoveries arising from selling power at lower
tariffs and 3) higher-than-expected rise in costs at Bumi, particularly
deferred stripping costs.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Power (TPWR.BO): Maintain Buy
What happened
We reiterate our Buy rating on Tata Power and our 12-month SOTPbased
target price of Rs1436, implying potential upside of about 40%.
Our positive view is based on two key factors:
1. Projects in pipeline not valued into share price: Tata Power
corrected by 24% YTD (underperformed Sensex by 7%). On our
calculations, the correction implies no value for the projects in the
pipeline. We believe the market will start assigning value for those
projects on completion of pre-construction activities.
Even if we were to remove the value of future projects (we estimate
Rs166/share) from our SOTP methodology, we believe the stock would
still be attractive, potentially offering more than 20% yield. We have
included the value of the future projects as there is no uncertainty on
fuel supplies.
We believe current prices imply most of the downside risks from
Mundra project. Any positive news, either in the form of tariff revisions
by beneficiaries of Mundra Project or successful implementation of
using low grade coal, would have a positive impact on the stock.
2. Existing business offers downside protection: With most of the
generation (except Mundra) and distribution assets operating under a
regulated mechanism, we see relatively lower risks for its existing
business. Tata Power earnings and valuation have very low sensitivity to
changes in fuel prices, utilization rates and short-term rates.
Also, with the commissioning of Mundra project, we think its earnings
cyclicality would lessen as falling international coal prices would benefit
the project and vice versa. Although Tata Power has high earnings
sensitivity to coal prices, we believe the impact on valuation would be
limited as Tata Power has significantly underperformed the Indonesian
coal equities from the start of 2011 (Exhibits 34 & 35). A drop in
international coal prices should have a limited impact on its stock price.
Valuation:
We reiterate our Buy rating with a 12-month SOTP-based target price of
Rs1436, implying upside potential of 40%. We value the coal business at
6x FY12E EV/EBITDA.
Key Risks:
The following are three key downsides risks: 1) disclosures during the
2Q results season that suggest greater-than-anticipated losses arising
from Mundra; 2) news flow indicating that Tata Power distribution arms
will be asked by the respective state governments to absorb some
portion of the under-recoveries arising from selling power at lower
tariffs and 3) higher-than-expected rise in costs at Bumi, particularly
deferred stripping costs.
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