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● We attended Tata Power’s analyst meet. Most of the queries were
related to the potential losses at its Mundra UMPP project.
Management believes the new Indonesian mining regulation has
the potential to increase project’s losses by US$100 mn.
● But, in order to minimise losses, management expects to operate
the project at a lower PLF of 70-72%, which we believe would be
difficult as it would have to demonstrate 80% plant availability to
recover its fixed costs and our view is that most procurers would
expect the project to run at an optimal PLF given its cheaper tariff.
● Alternatively, management plans to run the project on low-grade
imported coal expected to be sourced from other countries
(excluding Indonesia). Contrary to consensus view, management
believes its ability to source and operate project on low-grade coal
would turn the project profitable.
● However, company guided for very weak coal volume growth at
the Indonesian business (5-10% growth over CY10 during
CY11/12). Consequently, we cut our earnings for FY12/13/14 by
19%/ 14%/ 29% and price target by 14%. Maintain NEUTRAL.
First unit of Mundra UMPP to commission by March 2012
Due to continuing delays in the implementation of evacuation infra at
the Mundra UMPP project, its commissioning is likely to be delayed by
a month. Tata Power expects the transmission lines to be ready by
end-Oct 2011. Considering four months for synchronisation, the first
unit is expected to commission by March 2012.
Despite concern on losses from Mundra UMPP’s operations, Tata
Power plans to commission the project as soon as possible to (1)
meet its contractual commitments, (2) start earning the capacity
charge (fixed cost) for the project and (3) run pilot tests to evaluate the
project’s ability to operate on low grade coal.
New Indonesian regulation to result in US$100 mn of loss
Tata Power had planned to procure about 2.5 mmtpa of coal for the
Mundra project at a fixed price from Indonesia (we expect this price to
be about US$40/tonne). However, since the new mining regulation in
Indonesia (effective from 23 September 2011) restricts coal imports
below a benchmark price, the procurement of this coal is likely to be
almost twice as expensive, resulting in a loss of US$100 mn p.a.
First year tariff at Mundra expected at Rs2.21/kwh
Management guided for first year tariff at Mundra UMPP project of
Rs2.21/kwh – based on 0.91/kwh of capacity charge and Rs1.3/kwh of
energy charge (assuming landed coal cost of US$120/tonne). Besides,
the company highlighted that it has already sourced about 1 mmt of
coal based on its contractual price from Indonesia prior to the
implementation of the Indonesian regulation. This should restrict
losses at Mundra during FY12/13 versus our initial expectations.
Expects to operate Mundra project at about 70-72% PLF
Despite meeting its requirement to demonstrate 80% plant availability
(PAF) in order to earn its capacity charges/ fixed cost entitlements for
the project (fall in PAF below 80% would result in under-recovery of its
fixed costs), Tata Power plans to operate Mundra UMPP at only 70-
72% PLF. We believe maintaining lower PLF despite demonstrating
80% PAF would be difficult to achieve as Mundra’s cheaper tariff,
would result in most procurers requiring it to operate at optimal PLF.
Expects Mundra UMPP to be profitable on low-grade coal
If the pilot tests are successful, Tata Power plans to source low-grade
imported coal of about 4,500 kcal from other countries versus
Indonesian coal of about 5,500 kcal planned currently. Tata Power
expects to source such coal at just US$40-50/tonne (however, it did
not reveal the coal source). This would help the company avoid likely
losses from the new Indonesian mining regulation.
Contrary to general expectations, Tata Power claims that it would turn
the Mundra UMPP project profitable with the use of low-grade coal
even after adjusting for the high transportation cost and low boiler
efficiency (on account of likely high ash content) associated with the
use of low grade coal.
Guided for marginal growth in Indonesian coal volumes
Tata Power guided for about 63 mmtpa of coal sales at KPC and
Arutmin during CY11 and 66 mmtpa during CY12 (implying just 5-10%
growth over about 61 mmtpa witnessed during CY10). However, the
company expects coal sales to reach 75 mmtpa during CY13. We
were expecting higher increase in coal sales at Bumi’s mines in line
with its stated plans to reach 100 mmtpa coal volumes in three years.
Cut earnings and price target. Maintain NEUTRAL
We cut our earnings for FY12/13/14 by 19%/ 14%/ 29% and price
target by 14% to Rs1,043 mainly led by cut in coal volumes and
conservatively assuming no discount to spot coal price for Mundra
project versus 20% earlier as we await clarity on Mundra UMPP’s
ability to operate on low-grade coal. We maintain our NEUTRAL rating
for the stock.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
● We attended Tata Power’s analyst meet. Most of the queries were
related to the potential losses at its Mundra UMPP project.
Management believes the new Indonesian mining regulation has
the potential to increase project’s losses by US$100 mn.
● But, in order to minimise losses, management expects to operate
the project at a lower PLF of 70-72%, which we believe would be
difficult as it would have to demonstrate 80% plant availability to
recover its fixed costs and our view is that most procurers would
expect the project to run at an optimal PLF given its cheaper tariff.
● Alternatively, management plans to run the project on low-grade
imported coal expected to be sourced from other countries
(excluding Indonesia). Contrary to consensus view, management
believes its ability to source and operate project on low-grade coal
would turn the project profitable.
● However, company guided for very weak coal volume growth at
the Indonesian business (5-10% growth over CY10 during
CY11/12). Consequently, we cut our earnings for FY12/13/14 by
19%/ 14%/ 29% and price target by 14%. Maintain NEUTRAL.
First unit of Mundra UMPP to commission by March 2012
Due to continuing delays in the implementation of evacuation infra at
the Mundra UMPP project, its commissioning is likely to be delayed by
a month. Tata Power expects the transmission lines to be ready by
end-Oct 2011. Considering four months for synchronisation, the first
unit is expected to commission by March 2012.
Despite concern on losses from Mundra UMPP’s operations, Tata
Power plans to commission the project as soon as possible to (1)
meet its contractual commitments, (2) start earning the capacity
charge (fixed cost) for the project and (3) run pilot tests to evaluate the
project’s ability to operate on low grade coal.
New Indonesian regulation to result in US$100 mn of loss
Tata Power had planned to procure about 2.5 mmtpa of coal for the
Mundra project at a fixed price from Indonesia (we expect this price to
be about US$40/tonne). However, since the new mining regulation in
Indonesia (effective from 23 September 2011) restricts coal imports
below a benchmark price, the procurement of this coal is likely to be
almost twice as expensive, resulting in a loss of US$100 mn p.a.
First year tariff at Mundra expected at Rs2.21/kwh
Management guided for first year tariff at Mundra UMPP project of
Rs2.21/kwh – based on 0.91/kwh of capacity charge and Rs1.3/kwh of
energy charge (assuming landed coal cost of US$120/tonne). Besides,
the company highlighted that it has already sourced about 1 mmt of
coal based on its contractual price from Indonesia prior to the
implementation of the Indonesian regulation. This should restrict
losses at Mundra during FY12/13 versus our initial expectations.
Expects to operate Mundra project at about 70-72% PLF
Despite meeting its requirement to demonstrate 80% plant availability
(PAF) in order to earn its capacity charges/ fixed cost entitlements for
the project (fall in PAF below 80% would result in under-recovery of its
fixed costs), Tata Power plans to operate Mundra UMPP at only 70-
72% PLF. We believe maintaining lower PLF despite demonstrating
80% PAF would be difficult to achieve as Mundra’s cheaper tariff,
would result in most procurers requiring it to operate at optimal PLF.
Expects Mundra UMPP to be profitable on low-grade coal
If the pilot tests are successful, Tata Power plans to source low-grade
imported coal of about 4,500 kcal from other countries versus
Indonesian coal of about 5,500 kcal planned currently. Tata Power
expects to source such coal at just US$40-50/tonne (however, it did
not reveal the coal source). This would help the company avoid likely
losses from the new Indonesian mining regulation.
Contrary to general expectations, Tata Power claims that it would turn
the Mundra UMPP project profitable with the use of low-grade coal
even after adjusting for the high transportation cost and low boiler
efficiency (on account of likely high ash content) associated with the
use of low grade coal.
Guided for marginal growth in Indonesian coal volumes
Tata Power guided for about 63 mmtpa of coal sales at KPC and
Arutmin during CY11 and 66 mmtpa during CY12 (implying just 5-10%
growth over about 61 mmtpa witnessed during CY10). However, the
company expects coal sales to reach 75 mmtpa during CY13. We
were expecting higher increase in coal sales at Bumi’s mines in line
with its stated plans to reach 100 mmtpa coal volumes in three years.
Cut earnings and price target. Maintain NEUTRAL
We cut our earnings for FY12/13/14 by 19%/ 14%/ 29% and price
target by 14% to Rs1,043 mainly led by cut in coal volumes and
conservatively assuming no discount to spot coal price for Mundra
project versus 20% earlier as we await clarity on Mundra UMPP’s
ability to operate on low-grade coal. We maintain our NEUTRAL rating
for the stock.
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