The spike in prices of imported coal over the past three months augurs well for earnings from Indonesian mines for Tata Power, even as the loss levels at the Mundra UMPP will likely increase. A favourable outcome on the regulatory uncertainty surrounding Mundra and/or part-sale of coal mines in Indonesia could further improve the overall coal equation. Maintain ADD rating with a revised target price of R85/share factoring sustainable coal prices of $70/tonne.
Tata Power’s ownership in coal mines in Indonesia gives it attributable sales of 25 mtpa (based on sales of 83 million tonne in FY2017E), against which coal consumption at the Mundra UMPP is 10 mtpa. Even after adjusting for a tax incidence of 40% for the coal mines and without compensation for the Mundra UMPP, Tata Power is a net beneficiary of 5 mtpa, implying that a $10/tonne increase in coal prices impacts consolidated earnings by R3.6 billion (R1.3/share).
Assuming a favourable final outcome on the coal cost under-recovery at the Mundra UMPP, Tata Power’s coal equation leans more favourably towards rising coal prices. The long anticipated sales of part coal mines in Indonesia further helps TPWR monetise on higher prices of imported coal. Prices of imported coal are up 57 % YTD and currently stand at $83/tonne compared with $53/tonne at the start of the year, though lower from the peak prices of $100/tonne seen in November 2016.