Tata Power HOLD- Bleak on core; Bumi dividend positive:: ICICI Sec

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Tata Power (TPL) reported below expected adjusted PAT at Rs3.9bn (I-Sec:
Rs4.96bn) primarily owing to: 1) Weak merchant realisation in Mumbai and Haldia
at Rs3.6-4.2/KwHR; 2) Lower generation at Trombay hit by turbine issue at Unit-5;
and 3) Lower production at Bumi owing to heavy rainfall and higher cash cost of
production of coal (~US$37/te). However, improved dividend from Bumi, at
~US$39mn after five quarters of negligible dividend, increased Street’s faith in
coal mine’s cashflow to support TPL’s growth ambition. Further, the management
confirmation for not being in race for Intergen assets any more, assuages
concern, as this would have not only weakened the balance sheet but also
strained the profitability. We maintain our neutral stance on TPL given: 1) Low
return from power portfolio particularly Mundra commencing operations in FY12;
ii) Continued dilution to fund growth (24% dilution in previous three years); iii)
Low profitability in merchant owing to high cost structure; and (iv) Our fair value
of Rs1,258 suggesting a 5% downside. Key upside risks being dilution of
unrelated investment (upside Rs80/share) and rising coal prices (US$10/te rise in
coal prices increases target price 9%). Maintain HOLD.


􀁦 Bumi – Rain marred quarter, dividend a silver lining. Production was lower at
12.4mnte primarily hit by heavy rainfall. Low production and increased operational
costs took overall cash cost of production to US$37.3/te. Realisations up 27% YoY
at US$73.7/te supported the overall profitability from coal business. Further, after
five quarters of negligible dividend, the company received US$39mn dividend from
the coal business, mitigating concern over the cashflow.

􀁦 Standalone – Low merchant price and plant shutdown impact performance.
Weak merchant realisation at Rs3.6-4.2/KwHR, plant shutdown at Trombay on
technical issue at turbine (Unit-5) and external cheap power vs Unit-6 led profit
(adjusted for dividend income) dip sharply to Rs1.36bn (I-Sec: Rs2.01bn).

􀁦 Intergen concern behind. The management confirmed that they were no more in
race for Intergen’s assets. This assuages a huge concern over the stock, as
Intergen acquisition would have caused severe stress on balance sheet and
profitability.