We upgrade Tata Power shares to ‘neutral’ on back of factors such as likely tariff hike for Mundra UMPP in the near future, 14% underperformance vs BSE Sensex over last month and likely reasonable valuations after the tariff hike (13.8x P/E and 1.4x P/BV on FY15E). We increase our target price to Rs 81 (from Rs 73) to factor in EPS revisions.
Media reports suggest that the Deepak Parekh committee has recommended a gross hike of 0.56-0.58 R/kWh. This would be adjusted by profits earned in Indonesian coal mines proportionate to coal offtake by Mundra UMPP.
The committee has based its calculations on a $64.38/tonne of Indonesian coal on July 13, 2013. The current tariff is R2.44/kWh for FY14E. Third-party sale of power beyond 80% availability (prohibited under current agreement) could also be considered. While the management said it can’t comment until it receives a copy of the recommendations, we expect it will be unveiled in the next couple of days, after which CERC will look into the matter and, hopefully, the final ruling will come by October.
We build in a net compensatory hike of 0.20 R/kWh in our estimates. However, reports suggest the gross hike would be 0.58 R/kWh and if the coal mine profits are extrapolated, the net hike would be 0.54 R/kWh in FY14E.
After the first quarter, we had not cut our coal mine Ebit adequately and so have done so now. Our parent estimates don’t change, but cons estimates do by -40% to +14% over FY14E-16E. The upside risks to the call is not factoring in third-party sales beyond 80% availability into the estimates, which, logically, should be on as long as variable charges are greater than the fuel price.