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Tata Power (TPWR)
Utilities
Annual analyst meet – Mundra remains the focal point. The Mundra UMPP
continues to be the key area of concern for Tata Power (TPWR) even as the
management highlighted steps being undertaken to address the same. The
management also highlighted that Mundra was likely to operate at PLFs in the range of
72-78%. We maintain our BUY rating and reiterate that TPWR will remain a net
beneficiary of rising prices of coal though lower PLF at Mundra and higher production
at coal mines remain the key.
Exploring options to offset losses at Mundra
The management has indicated that it is in process of exploring other options to minimize/offset
losses at Mundra, including (1) initiation of talks with beneficiaries and (2) usage of low-grade coal
at Mundra. The management has indicated that formal discussions with the beneficiaries
regarding potential tariff revision are about to commence. Further, TPWR is planning pilot runs
with low-quality coal on its first unit at Mundra. The management has also indicated that the draft
guidelines in Indonesia that aim to stop the export of low-quality coal without upgradation are
unlikely to materialize owing to unfavorable cost-benefit ratio of upgrading low-quality coal.
Mundra likely to operate at PLFs in the range of 72-78%
As highlighted by us previously, the Mundra UMPP will likely operate at a PLF ranging from
72-78% while maintaining an availibility of 80%, thus minimizing losses on fuel cost while
maximizing recovery of capacity charge. Although the extent of dispatch will be governed by
actual demand from the beneficiaries, the management has indicated that average annual PLF of
the Mundra UMPP will likely be in the range of 72-78%. We note that our estimates factor a PLF
of 75% and availibility of 80% at Mundra.
Bumi to ramp up production capacity to 75 mtpa by end-CY2012E
The management has guided for capacity ramping up to 75 mtpa by end-CY2012E with full
volume impact by CY2013E. We factor volumes of 70 mn tons in FY2013E. We discuss the
potential impact of PLF at Mundra clubbed with volumes and realization of the coal business in a
subsequent section.
Maintain BUY with a target price of Rs1,350/share
We maintain our BUY rating on Tata Power with a target price of Rs1,350/share. As highlighted
above, despite the potential losses at Mundra, TPWR will remain a net beneficiary of rising prices
of coal which could be further magnified by a more aggressive production ramp-up at Bumi. We
continue to like TPWR’s core distribution business which earns a stable return and is insulated from
risks of deteriorating financial health of SEBs.
Ownership in coal mines offsets losses at Mundra, lower PLF and higher
production at coal mines remain the key
As highlighted in our note titled ‘Revisiting the coal equation’ dated August 25, 2011, TPWR
ownership in coal mines in Indonesia offsets the losses of rising coal prices at Mundra while
allowing TPWR to benefit from rising prices of coal. We note that taxes and royalties at the
coal mines (45% +10%) imply that TPWR is just about hedged to meet the impact at
Mundra at current production of ~60 mtpa. However, ramp-up in coal production at the
coal mines allows TPWR to be a net beneficiary of rising coal prices.
TPWR will be able to maximize the benefits of rising prices of coal by (1) minimizing losses at
Mundra through low yet optimal utilization (PLF) of the Mundra capacity, and (2) aggressive
ramp-up in production at the Indonesian mines. Operating at 75% PLF minimizes losses on
fuel cost while maximizing recovery of capacity charge. Correspondingly, production rampup
at Indonesia will allow TPWR as a consolidated entity to (1) offset the losses at Mundra
(which it does at current level of production), and (2) benefit from excess production (over
and above the hedge requirement) of coal. To understand the point above, see Exhibit 1
below which charts the sensitivity of our fair value estimate to different PLF and volumes
assumptions for Mundra and Bumi at varying sustainable realizations for coal
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Power (TPWR)
Utilities
Annual analyst meet – Mundra remains the focal point. The Mundra UMPP
continues to be the key area of concern for Tata Power (TPWR) even as the
management highlighted steps being undertaken to address the same. The
management also highlighted that Mundra was likely to operate at PLFs in the range of
72-78%. We maintain our BUY rating and reiterate that TPWR will remain a net
beneficiary of rising prices of coal though lower PLF at Mundra and higher production
at coal mines remain the key.
Exploring options to offset losses at Mundra
The management has indicated that it is in process of exploring other options to minimize/offset
losses at Mundra, including (1) initiation of talks with beneficiaries and (2) usage of low-grade coal
at Mundra. The management has indicated that formal discussions with the beneficiaries
regarding potential tariff revision are about to commence. Further, TPWR is planning pilot runs
with low-quality coal on its first unit at Mundra. The management has also indicated that the draft
guidelines in Indonesia that aim to stop the export of low-quality coal without upgradation are
unlikely to materialize owing to unfavorable cost-benefit ratio of upgrading low-quality coal.
Mundra likely to operate at PLFs in the range of 72-78%
As highlighted by us previously, the Mundra UMPP will likely operate at a PLF ranging from
72-78% while maintaining an availibility of 80%, thus minimizing losses on fuel cost while
maximizing recovery of capacity charge. Although the extent of dispatch will be governed by
actual demand from the beneficiaries, the management has indicated that average annual PLF of
the Mundra UMPP will likely be in the range of 72-78%. We note that our estimates factor a PLF
of 75% and availibility of 80% at Mundra.
Bumi to ramp up production capacity to 75 mtpa by end-CY2012E
The management has guided for capacity ramping up to 75 mtpa by end-CY2012E with full
volume impact by CY2013E. We factor volumes of 70 mn tons in FY2013E. We discuss the
potential impact of PLF at Mundra clubbed with volumes and realization of the coal business in a
subsequent section.
Maintain BUY with a target price of Rs1,350/share
We maintain our BUY rating on Tata Power with a target price of Rs1,350/share. As highlighted
above, despite the potential losses at Mundra, TPWR will remain a net beneficiary of rising prices
of coal which could be further magnified by a more aggressive production ramp-up at Bumi. We
continue to like TPWR’s core distribution business which earns a stable return and is insulated from
risks of deteriorating financial health of SEBs.
Ownership in coal mines offsets losses at Mundra, lower PLF and higher
production at coal mines remain the key
As highlighted in our note titled ‘Revisiting the coal equation’ dated August 25, 2011, TPWR
ownership in coal mines in Indonesia offsets the losses of rising coal prices at Mundra while
allowing TPWR to benefit from rising prices of coal. We note that taxes and royalties at the
coal mines (45% +10%) imply that TPWR is just about hedged to meet the impact at
Mundra at current production of ~60 mtpa. However, ramp-up in coal production at the
coal mines allows TPWR to be a net beneficiary of rising coal prices.
TPWR will be able to maximize the benefits of rising prices of coal by (1) minimizing losses at
Mundra through low yet optimal utilization (PLF) of the Mundra capacity, and (2) aggressive
ramp-up in production at the Indonesian mines. Operating at 75% PLF minimizes losses on
fuel cost while maximizing recovery of capacity charge. Correspondingly, production rampup
at Indonesia will allow TPWR as a consolidated entity to (1) offset the losses at Mundra
(which it does at current level of production), and (2) benefit from excess production (over
and above the hedge requirement) of coal. To understand the point above, see Exhibit 1
below which charts the sensitivity of our fair value estimate to different PLF and volumes
assumptions for Mundra and Bumi at varying sustainable realizations for coal
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