Tata Power - Mundra Tariff Revision - A Key Trigger; Maintain "BUY" - Karvy

Tata Power Company (TPCL) has underperformed the Sensex by 4.3% over the last year, while the scrip outperformed Power Index by 11.9%., We believe that Mundra project losses to peak in FY15 once all the phases come on stream; unless the project gets a tariff relief it would remain a major overhang for the stock. We believe current prices imply most of the downside risks from Mundra project. Any positive development either in the form of tariff revision for Mundra UMPP for execution of using low grade coal, would have a positive impact on the stock.

Tariff Revision for Mundra on Cards: We believe that Mundra UMPP has been a big overhang for TPCL in terms of profitability and a tariff hike of 30-35p per kWh would be enough to make Mundra's NPV neutral. Though TPCL is negotiating with its customers for tariff revision due to changes in Indonesian law, the Rajasthan and Haryana SEBs oppose the move, as they are incurring huge losses.

Regulatory Regime offers Downside Protection: We see relatively lower risks, as TPCL's most of the generation assets - except Mundra UMPP - and distribution assets operating under a regulated regime. However, TPCL's consolidated RoE likely to remain subdued in the near-term sans tariff revision. However, we can't rule out the possibility of partial relief, as a regulatory framework being discussed by the CERC. Again, Maithon Project may under-recover, as railway line for coal evacuation - which has been delayed - will be ready only by Dec'13.

Coal business- Off-take Impacted, Expect better 2HFY13

Although the coal business reported higher production growth 14% YoY in Q2FY13, its off take was impacted by bottlenecks in coal transportation from mine to port leading to pile-up in inventory. Our interaction with the management recently highlights that there has been reduction in the inventory in October-Nov2012. Going forward, as the production ramp-up, management expects the cash cost to come down by US$3-4/tonne thereby improving margins.

Key Risks:

- Non revision of Tariff related to Mundra UMPP could lead to financial risks in terms of further support for working capital/ debt repayment.

- Slower progress of upcoming projects

Outlook & Valuation

At the CMP, as the stock trades at 7.6xFY14E EV/EBITDA & 1.7x FY14E P/BV, we believe many negatives have already factored in the price. Thus, we reiterate our "BUY" recommendation on TPCL with target price of Rs. 122 per share, implying 15% upside from the CMP.

Source : Equity Bulls

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