A 6-year-long battle has finally come to an end — albeit not in favour of Tata Power. The Supreme Court has decided against giving a compensatory tariff hike to Tata Power on its 4,000 MW Mundra UMPP plant. The final order, with details, is still awaited. Our TP of `100 factored no upside from a potential hike. We believe upside remains from development on mine sales, renewable energy scale-up, refinancing and B/S improvement.
No change in Indian law cited: We were hopeful of a favourable court verdict, at least in-line with CERC’s suggested hike. Media reports said the Supreme Court stated that higher fuel prices due to change in Indonesian laws is not a valid reason for a hike and only changes in Indian laws should be considered. We did not factor a favourable decision into our estimates. The verdict only removes the option value we hoped would fructify — `4/sh to target price for every 5p hike.
Mundra — cost and higher unit sale the focus: The Supreme Court’s order is awaited, including details on whether an appeal is possible. We believe management will focus more aggressively on containing costs at Mundra and increasing unit sales since the potential tariff hike seems to be behind us. Mundra UMPP has been operating at the needed base availability of 85% as per the PPA on a sustainable basis. Our understanding is that the SEBs have the right of first refusal on surplus power generated. Tata Power could add 4-5% to consolidated profits for every 5% higher availability. Also, every 1% reduced coal cost will improve consolidated profit by 2%. We remain positive on Tata Power as we believe the next 12 months will see the stock re-rate on improved financials.
Valuation/Risks: We value Power at `67/share, Coal mines at `30/sh and others at 5x EV/Ebitda FY18e. Maintain Buy with target price of `100. Downside risks are (i) availability issues at regulated assets; (ii) and a sharp fall in coal prices.
Company description: Tata Power is India’s largest integrated power company. The company has an installed generation capacity of 5,297 MW. It is also developing the country’s first Ultra Mega Power Project (UMPP) at Mundra in Gujarat.