An improvement in coal prices and sustained cost reduction augurs well for the earnings of Tata Power — a combination of improved coal prices (by $10/tonne) and compensatory tariff for Mundra UMPP would imply 90% revision in FY2015E earnings and raise fair value to R130/share. In the absence of the tariff order (as potential litigations may follow) and visibility of sustenance of the current coal price trend, we maintain our earnings estimates of R5.35/share and R5.79/share for FY14 and FY15, respectively.
Coal prices have recovered by as much as 20% from their lows in September 2013. We note that a $10/tonne increase in coal realisations improves TPWR valuation by R21/share in case of full fuel pass-through, at Mundra, and R12/share in case of no pass-through. We previously highlighted the likely bottoming of coal prices near cash costs for the global production basket (~$70/tonne), though we also believe the current uptick can only be sustained through steady demand recovery by key Asian importers — China, India and Japan. We also note steady coal volumes (~20 mtpa) during the past four quarters and consequent improvement in cash cost of production that has gone unnoticed while the focus has been on steady price declines.
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