Tata Power rating – Buy: Policy tweak a positive for Mundra plant

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October 18, 2021 2:45 AM

Room for ~50% upside in valuation of solar biz; ‘Buy’ maintained with TP of Rs 170

With GOI now allowing CGPL to sell power on the exchanges for an interim period (not quantified yet) our sensitivity analysis suggests TPCL could make additional profits of Rs 0.8-3 bn.

In order to ease spiralling merchant prices, GOI has allowed imported coal based power plants to sell power on the exchanges for an interim period. This is positive for Tata Power (TPCL) as –a) Mundra power plant (4GW) operating at sub-par PLFs can now operate at 80% PLF (currently 15 days’ coal reserves). b) TPCL can generate additional PAT of Rs 0.8-3 bn or 5-15% of FY22e PAT assuming merchant prices between Rs 7-12/unit post sharing of 50% profits with five PPA states.

In yet another positive development, RIL’s acquisition of 40% stake in Sterling & Wilson (S&W) at 20-25x FY23e P/E underpins our thesis on Tata Power Solar’s (TPSL’s) much superior business prospects and leaves room for valuation upside of ~50% (Rs 10/share). Maintain Buy.

CGPL (Mundra plant) can gain on high merchant prices: In a high coal price scenario, CGPL’s losses balloon as it sells power only to its five designated PPA states at fixed tariff, hence under-recovery. With GOI now allowing CGPL to sell power on the exchanges for an interim period (not quantified yet) our sensitivity analysis suggests TPCL could make additional profits of Rs 0.8-3 bn.

Outlook: Triggers playing out– TPCL benefits from current coal prices (Rs 120/tonne adjusted for calorific value) as cash profit from integrated operations improves by 50% plus to Rs 4.5 bn. Further, GOI latest policy allowing imported coal based plants to sell on the exchanges could further provide a meaningful earning kicker for FY22e. The Centre’s attempt to resolve the Mundra issue, RE monetisation and deals like S&W at much higher valuations are potent triggers for TPCL’s sustained re-rating. We like the company’s nimble-footed approach towards energy transition—RE, EVs, etc. Retain Buy with a TP of Rs 170.

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