Under the DMO, introduced just before the elections in Indonesia, 25% of the mine production was to be sold to domestic buyers (mainly PLN) at a capped price.
Tata Power (TPWR)’s stock price correction by 24% over the last 1 month seems overdone as the company has managed to improve Q1FY20 profitability by 40% y-o-y led by benefits of lower coal prices and better coal sourcing leading to lower fuel cost under recovery at CGPL at `0.55/kWh (vs `0.93/kWh y-o-y). This is despite many headwinds such as the impact of Domestic Market Obligation (DMO) on mining profitability, delay in resolution of CGPL leading to continuing losses at Mundra, delay in closing the Prayagraj acquisition. We expect liquidation of non-core assets to pick up pace in H2FY20, leading to a partial repayment of non-core debt resulting in an earnings growth of 28% CAGR over FY20-21E with an underlying Ebitda of ~`10,000 crore growing at a 5% CAGR. We maintain ‘buy’ on the stock with an unchanged target price of `87 a share; stock is trading at 0.7x FY21E P/BV.
Under the DMO, introduced just before the elections in Indonesia, 25% of the mine production was to be sold to domestic buyers (mainly PLN) at a capped price. Hence, this led to “net long” position of TPWR becoming ineffective as profitability was impacted by `240 crore in FY19. This regulation was from January 2018 to December 2019 and will be reviewed before the expiry of the term. We do not expect this to be extended mainly due to coal prices declining globally leading to lower costs for PLN and making price cap “irrelevant”.
As per our checks, after Gujarat, Punjab has also accepted the revised proposals of the high-powered committee (HPC); however, response of other beneficiary states such as Maharashtra, Haryana and Rajasthan is awaited. In a meeting held with all the beneficiaries on July 17, all the states have in-principle agreed to revise the tariff upwards and take the revised PPA to their respective state cabinets for approval.
We believe Maharashtra and Haryana may approve it post the state elections in September-October 2019. The approval of the proposal will lead to an incremental profit of `750 crore per annum on a loss of `1,650 crore incurred in FY19 (rise in SoTP by `28/sh). What gives us the comfort is that even after the hike of `0.3/kWh, the tariff of CGPL will be very competitive at `3.2/kWh.