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Ta t a Power
Focus on UMPP loss at analyst
meet; Going global to derisk
„Factor in higher coal costs; Cut EPS & PO; Neutral
Key takeaways from the Tata Power analyst meet were: a) Indonesian (Indo) Govt. is
unlikely to allow export of coal below index and hence, if Indian Govt. doesn’t allow
higher coal costs as ‘change of law’, TPC will have to foot the bill, b) TPC to expand
abroad – Australia, Indonesia and MENA – having been frustrated with the slow pace
of progress in India to reach its goal of 25GW by FY17E, and c) 5.4GW of thermal
capacity may start construction in FY13, which may require cash-calls. We cut our PO
to Rs1265 (1470) to factor in higher Indo coal costs (cut FY13E EPS 18%) and interest
rate at Mundra UMPP. Maintain Neutral led by declining EPS / RoE beyond FY12E on
loss-making UMPP, premium valuations – FY12E P/BV of 1.6x vs sector 1.4x, upside
risk to losses at UMPP on inability to source cheaper coal and risk of global expansion.
Regulatory risk: focus on UMPP losses & strategies to cut it
Our key risk for TPC has materialized as Govt of Indonesia has disallowed the export of
~2.5mtpa of coal at fixed price (~$40/tn) for 5 years per Mundra UMPP’s contract with
Indo mines and the Indian Govt. is unable to decide whether to allow ‘change of law’ in
Indonesia as pass-through. Consequently, TPC will have to foot the bill. Key strategies
of mgt. to reduce losses are a) operate plant at lower PLF of 73-75% to save on coal, b)
try low-grade cheaper coal vs 6300kcal planned earlier, c) acquire captive coal mine/
supply, d) Stocked ~1mt of low priced coal before the new Indo law came into force.
Reiterate our Neutral rating; Risk of global expansion added
We see TPC adding globalization risk with its strategy to expand abroad, given the
slow pace of progress in India to reach its goal of 25GW by FY17E vs 3.1GW in FY11.
Also 5.4GW of its thermal capacity at four locations in India is reaching advanced
stage of execution and may start construction in FY13, which may require cash calls.
Uplifting of coal resources and scale-up in production to 100mtpa in 3-4 years’ time at
Indonesian coal mines should improve visibility of profits. Risk: Depletion of high kCal
coal reserves (Prima), lower net-long coal position with the start of Mundra UMPP, fall
in merchant prices in FY12 and onwards create volatility in earnings.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Ta t a Power
Focus on UMPP loss at analyst
meet; Going global to derisk
„Factor in higher coal costs; Cut EPS & PO; Neutral
Key takeaways from the Tata Power analyst meet were: a) Indonesian (Indo) Govt. is
unlikely to allow export of coal below index and hence, if Indian Govt. doesn’t allow
higher coal costs as ‘change of law’, TPC will have to foot the bill, b) TPC to expand
abroad – Australia, Indonesia and MENA – having been frustrated with the slow pace
of progress in India to reach its goal of 25GW by FY17E, and c) 5.4GW of thermal
capacity may start construction in FY13, which may require cash-calls. We cut our PO
to Rs1265 (1470) to factor in higher Indo coal costs (cut FY13E EPS 18%) and interest
rate at Mundra UMPP. Maintain Neutral led by declining EPS / RoE beyond FY12E on
loss-making UMPP, premium valuations – FY12E P/BV of 1.6x vs sector 1.4x, upside
risk to losses at UMPP on inability to source cheaper coal and risk of global expansion.
Regulatory risk: focus on UMPP losses & strategies to cut it
Our key risk for TPC has materialized as Govt of Indonesia has disallowed the export of
~2.5mtpa of coal at fixed price (~$40/tn) for 5 years per Mundra UMPP’s contract with
Indo mines and the Indian Govt. is unable to decide whether to allow ‘change of law’ in
Indonesia as pass-through. Consequently, TPC will have to foot the bill. Key strategies
of mgt. to reduce losses are a) operate plant at lower PLF of 73-75% to save on coal, b)
try low-grade cheaper coal vs 6300kcal planned earlier, c) acquire captive coal mine/
supply, d) Stocked ~1mt of low priced coal before the new Indo law came into force.
Reiterate our Neutral rating; Risk of global expansion added
We see TPC adding globalization risk with its strategy to expand abroad, given the
slow pace of progress in India to reach its goal of 25GW by FY17E vs 3.1GW in FY11.
Also 5.4GW of its thermal capacity at four locations in India is reaching advanced
stage of execution and may start construction in FY13, which may require cash calls.
Uplifting of coal resources and scale-up in production to 100mtpa in 3-4 years’ time at
Indonesian coal mines should improve visibility of profits. Risk: Depletion of high kCal
coal reserves (Prima), lower net-long coal position with the start of Mundra UMPP, fall
in merchant prices in FY12 and onwards create volatility in earnings.
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