Negatives priced in

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Jan 16 2012, 01:42 IST

Tata Power’s stock price has corrected 30% over the past six months, given concerns surrounding losses at Mundra UMPP (Ultra Mega Power projects), delayed commissioning at Maithon, delayed ramp-up at Indonesia’s KPC (Kaltim Prima Coal)/Arutmin mines, etc. Tata Power is relatively better placed amongst other IPPs (independent power producers) given its regulated returns and fuel integration in a large part of the business. We believe that most known negatives are largely factored in the current valuations, and there exists possibilities to curtail losses. The stock price correction helps build a long-term investment case.

We believe that most negatives are getting factored in the valuations, and upside possibilities could be savings in fuel cost at Mundra UMPP due to blending of low GCV (gross calorific value) coal (about 20% of fuel cost), tax efficient structure for mining Holdco/UMPP, possible upwards revision for UMPP tariff and reversal of impairment provision given the softening coal prices.

Tata Power provided for MTM (marked-to-market) losses of R7.4 bn in Q2FY12, but it is comfortably positioned, as while translational gains from higher earnings at KPC/Arutmin mines can be retained; the increased costs are a pass through by way of higher tariffs in Mundra UMPP.

We have cut our FY12/13 earnings by 8%/3% to factor in lower production from KPC/Artumin mines (73m ton in FY14 vs 83m tons), lower contribution from Maithon project (Unit 2 CoD—commercial operation date—in Sep 2012), lower merchant contribution (100 MW Trombay transferred on regulated basis), and tax on dividend received from mining Holdco (holding company)

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