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Tata Power (TPWR)
Utilities
Structuring the coal hedge. Tata Power’s 2QFY12 earnings call was dominated by a
discussion of the proposed transfer of the coal assets to Mundra--thereby lending
comfort to lenders on cash flow support and to prevent impairment of the equity
invested. In our view, varied interpretations of the proposed re-structuring and the
accounting treatment may keep a check on stock performance. We continue to remain
positive on the prospects of the coal business, and maintain our BUY rating with a
revised target price of Rs125/share
Dividend from coal SPVs drives outperformance at standalone entity
TPWR reported standalone revenues of Rs18.6 bn (19% yoy, 1% qoq), operating profit of Rs3.4
bn (17% yoy, -4% qoq) and net profit of Rs3.1 bn (45% yoy, 6% qoq) in 2QFY12 compared to
our estimate of Rs16.7 bn, Rs3.2 bn and Rs2 bn, respectively. Net income was primarily boosted by
higher other income due to Rs2 bn of dividend from coal SPVs. We discuss key highlights of
standalone performance in a subsequent section.
Impairment provisioning and forex losses mar consolidated result
TPWR reported consolidated revenues of Rs62.5 bn (30% yoy, 8% qoq), operating profit of
Rs13.5 bn (20% yoy, -4% qoq) and net profit of Rs3.7 bn (9% yoy, -18% qoq) in 2QFY12.
Standalone revenues of Rs18.6 bn were augmented by (1) coal revenues of Rs21.7 bn,
(2) revenues from NDPL of Rs17.3 bn and (3) revenue from power trading of Rs3.9 bn,
respectively. The coal business continues to drive the consolidated earnings with strong realizations
of US$95/ton (29% yoy) and volumes of 16 mn tons in 2QFY12. However, reported loss of Rs12
bn includes (1) forex loss of Rs7.4 bn and (2) Rs8.2 bn of impairment for Mundra assets provided
for in accordance with revised coal price assumptions.
Transfer of part-ownership in coal assets to assure lenders and prevent impairment
TPWR proposes to transfer part-ownership (~75%) in the coal mining assets to Coastal Gujarat
Power Ltd (Mundra UMPP), thereby lending comfort to lenders of the project on debt servicing
and preventing impairment of investment made by TPWR (Rs42 bn). In our view, lack of
impairment suggests that the fair value of the coal assets (~75%) along with negative value of
Mundra UMPP is greater than or equal to Rs42 bn (Rs17/share) compared to Rs16/share value
ascribed by us, however, varied interpretations of the accounting treatment will likely keep stock
performance under check.
Maintain BUY with a target price of Rs125/share
We maintain our BUY rating on Tata Power with a target price of Rs125/share (previously
Rs135/share) as we factor dividend tax for cash flows from the coal SPVs. As we have been
highlighting, 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 stable
returns and is insulated from risks of deteriorating financial health of SEBs.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tata Power (TPWR)
Utilities
Structuring the coal hedge. Tata Power’s 2QFY12 earnings call was dominated by a
discussion of the proposed transfer of the coal assets to Mundra--thereby lending
comfort to lenders on cash flow support and to prevent impairment of the equity
invested. In our view, varied interpretations of the proposed re-structuring and the
accounting treatment may keep a check on stock performance. We continue to remain
positive on the prospects of the coal business, and maintain our BUY rating with a
revised target price of Rs125/share
Dividend from coal SPVs drives outperformance at standalone entity
TPWR reported standalone revenues of Rs18.6 bn (19% yoy, 1% qoq), operating profit of Rs3.4
bn (17% yoy, -4% qoq) and net profit of Rs3.1 bn (45% yoy, 6% qoq) in 2QFY12 compared to
our estimate of Rs16.7 bn, Rs3.2 bn and Rs2 bn, respectively. Net income was primarily boosted by
higher other income due to Rs2 bn of dividend from coal SPVs. We discuss key highlights of
standalone performance in a subsequent section.
Impairment provisioning and forex losses mar consolidated result
TPWR reported consolidated revenues of Rs62.5 bn (30% yoy, 8% qoq), operating profit of
Rs13.5 bn (20% yoy, -4% qoq) and net profit of Rs3.7 bn (9% yoy, -18% qoq) in 2QFY12.
Standalone revenues of Rs18.6 bn were augmented by (1) coal revenues of Rs21.7 bn,
(2) revenues from NDPL of Rs17.3 bn and (3) revenue from power trading of Rs3.9 bn,
respectively. The coal business continues to drive the consolidated earnings with strong realizations
of US$95/ton (29% yoy) and volumes of 16 mn tons in 2QFY12. However, reported loss of Rs12
bn includes (1) forex loss of Rs7.4 bn and (2) Rs8.2 bn of impairment for Mundra assets provided
for in accordance with revised coal price assumptions.
Transfer of part-ownership in coal assets to assure lenders and prevent impairment
TPWR proposes to transfer part-ownership (~75%) in the coal mining assets to Coastal Gujarat
Power Ltd (Mundra UMPP), thereby lending comfort to lenders of the project on debt servicing
and preventing impairment of investment made by TPWR (Rs42 bn). In our view, lack of
impairment suggests that the fair value of the coal assets (~75%) along with negative value of
Mundra UMPP is greater than or equal to Rs42 bn (Rs17/share) compared to Rs16/share value
ascribed by us, however, varied interpretations of the accounting treatment will likely keep stock
performance under check.
Maintain BUY with a target price of Rs125/share
We maintain our BUY rating on Tata Power with a target price of Rs125/share (previously
Rs135/share) as we factor dividend tax for cash flows from the coal SPVs. As we have been
highlighting, 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 stable
returns and is insulated from risks of deteriorating financial health of SEBs.
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