Tata Power held a conference call to discuss the recent Supreme Court order disallowing a compensatory tariff (CT) hike at Mundra. Management highlighted that financials/operations will not be impacted as CT had not been factored in. This holds true for planned expansions/ asset sales. Focus will be on containing costs at Mundra, especially on coal. Our Rs 100 TP has no upside from tariff hike and we believe core operations and financial prudence will drive re-rating.
Tata Power’s 4,000 MW Mundra power plant saw under-recovery of 70p/unit in Q3FY17. The plant was using Indonesian coal as the pending court case offered CT only against Indonesian coal. Going ahead, Tata Power is looking for lower grade coal options also for blending to contain costs and run the plant efficiently.
Every 1% reduced coal cost (through efficiency or blending) will improve consolidated profit by 2%. Additionally, SEBs involved in the PPA have right of first refusal on surplus power generated with option of selling in the market if they do not take the power. Tata Power could add 5% to consolidated profits if it improves availability from 85 to 90%.
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Reducing group leverage through monetisation of non-core assets (primarily group cross-holdings and non-power businesses) will also be a focus area.
CERC determines power tariffs under Section 62 (cost plus agreements) and Section 63 (bid out tariffs). Section 79 gives the regulator powers to address disputes and work on tariff revisions, but can be legally challenged by SEBs or the company. Management indicated they are speaking to their advisors for legal options, but the call focused on operations/plans considering CT has not been allowed. We have valued the Power division net of debt at Rs 67/sh (8x EV/ EBITDA FY18E), Coal mines at Rs 30/sh (DCF) and others segment at 5xEV/EBITDA FY18E. We maintain Buy with TP of Rs 100. Availability issues at regulated assets; a sharp fall in coal prices. Tata Power is India’s largest integrated power company with a presence in all the segments of the power sector i.e. generation, transmission, distribution and trading. The company has an installed generation capacity of 5,297 MW. It is one of the largest renewable energy companies in India and is also developing the country’s first Ultra Mega Power Project (UMPP) at Mundra (Gujarat).