Power in balance

We maintain our Overweight rating on Tata Power with a target price of R123 (from 125 earlier) as we build in the lower coal prices, and consequently lower value for coal business, while increase value for Mundra as cost comes down.

We use a sum-of-the-parts (SOTP) methodology to value Tata Power, given the differing risk/reward profiles for its various businesses. Our target price implies a 1.8x FY14e PB (price-to-book) and 13.9x FY14e PE (price-to-earnings) compared to the current FY13e PB of 1.8x (times) and PE of 18.9x.

We also remove the volatile flag as the stock is no longer volatile. Under our research model, for stocks without a volatility indicator, the neutral band is 5 percentage points above and below the hurdle rate for Indian stocks of 11%. For Tata Power, this translates into a neutral band of 6-16% above the current share price. However, downside risks include non-acceptance of tariff hike by customers of Mundra, higher-than expected mining costs, a proposed export tax on coal imposed by the Indonesian government further increasing losses at Mundra, rupee depreciation, increased interest rates and unfavourable regulatory changes in India or Indonesia.

Q2 results disappoints

Tata power reported 23% year-on-year increase in revenue at R77 bn, marginally below our estimate, but a much smaller 9% growth at the Ebitda (earnings before interest, taxes, depreciation, and amortisation) level, which was 10% below our estimate. The main contributor was a disappointment in the coal business, which

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