Tata Power – ADD No great surprises:: IIFL

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Tata Power’s 2QFY11 profit growth of 83% YoY was driven by
gains from sale of investments, as the power and coal businesses
reported flat profits YoY. Power profits were flat as generation
remained flat. Coal realisations were up 27% YoY, but volumes
were down 11% YoY, which partly offset the price rise. We think
that milestones in key projects and pick-up in the coal business in
2HFY11 would be key triggers for the stock’s outperformance
hereon. Maintain ADD.


Operational profits flat YoY: While TPC’s consolidated profit rose 83%
YoY in 2QFY11, core profit remained almost flat after adjusting for the
gains on profit on sale of investments, and FX fluctuations at Mundra
UMPP SPV. The power business’s PBIT increased 11% YoY (178% YoY
growth in NDPL), and coal PBIT rose 6% YoY, as price increases (27%
YoY) were offset by 11% YoY lower sales volumes. TPC sold non-core
investments aggregating to Rs1.8bn and also booked gains on sale from
the business division, which led profit growth.

Coal business expected to pick-up in 2HFY11: During 2QFY11, coal
sales from two mines were lower by 11% YoY owing to heavy rains in
Indonesia. Rains also increased the cash cost to US$37/tonne (21% YoY).
However, these were offset by higher realisations, which increased 27%
YoY to US$74/tonne. Given the firm realisations and expected ramp-up in
coal production, we expect 2HFY11 coal profit to be higher than 1HFY11.

Key projects on track: During the conference call, management said
that Mundra UMPP is 65% complete, and may actually commission unit-1
(800MW) ahead of schedule, ie, by 2QFY12. Maithon IPP (1GW) is also
85-90% complete. Thus, FY12 would be a watershed year for TPC, when
its key projects go on stream. Other projects, such as those in coastal
Maharashtra (2.4GW), Orissa (1.2GW) and Jharkhand (1.2GW) are
expected to begin construction activity in FY12.

We retain ADD: A pick-up in the coal business and progress in execution
of power projects bodes well for TPC’s outperformance hereon. We
maintain our consolidated earnings growth of 20% CAGR through FY10-
13ii, and ADD rating on the stock. Firmness in coal prices and milestones
in projects under execution would be key triggers for the stock.