Tata Power - Rating Revision - Mundra tariff and Arutmin Stake Sale: Key Triggers Ahead - Centrum

Rating: Buy; Target Price: Rs86; CMP: Rs74.9; Upside: 15%

Mundra tariff and Arutmin Stake Sale: Key Triggers Ahead

We upgrade Tata Power to BUY with a revised price target of Rs86 (Rs 90 earlier). Post our downgrade in Dec-13 and subsequent stock decline by 15% we see risk reward favourable at CMP. Although uncertainty prevails on Mundra tariff hike issue and utilization of cash post stake sale in Arutmin mine, we believe a tariff hike of Rs0.3/kWh built-in by us offers a margin of safety and net negative NPV of Rs4 assigned to the stake sale in Arutmin weeds out uncertainty to a large extent.

- Mundra UMPP: During the quarter, TPC reported a lower PAF of 69% vs. 85% in Q2FY14 and operated at lower PLF thereby partly under-recovering its unit fixed cost along-with fuel cost of Rs0.56/kWh. As per our sensitivity analysis, in a scenario of fuel cost pass-through in tariffs by Rs0.1/kWh, NPV will increase by Rs5.6/share. A scenario of no hike in tariff would however drag our price target to Rs64.

- Earnings Snapshot: EBITDA on a like to like basis adjusted with prior period revenue of Rs1.85bn, diminution in value of investments by Rs0.3bn and non-recurring expenses related to MDO claims, taxes and rehab cost pertaining to Arutmin mine of Rs2.3bn stood at Rs18.6bn (+8% YoY and -8%QoQ). PBIT for coal business at Rs0.2 bn (-92% QoQ) was dismal despite higher coal sales volume (+23% QoQ) as lower unit realization (-6% QoQ), MDO claims and prior taxes at Rs2.3bn, forex losses of Rs0.7bn on VAT and other unexplained cost items dragged PBIT. PBIT for power business at Rs10.4 bn (+18% QoQ) was mainly due to prior period revenue of Rs1.85bn.

- Outlook: Outcome from CERC's decision on tariff and its implementation will be a key variable to watch for in addition to utilization of cash post Arutmin stake sale and likely receipts of USD450mn (post tax) at Coal SPV in Q1FY15. TPC should be FCF positive from FY14E onwards, backed by subdued capex cycle, healthy cash flow from coal business and regulated 16-19% returns from nearly half its generation capacity. We have revised FY14/15E earnings to factor-in stake sale in Arutmin, forex loss, moderation in tax rates and lower generation from Mundra UMPP in FY14E.

- Valuations and key risks: We value individual projects/businesses either using the DCF or assigning a multiple to its book value, to arrive at our PT of Rs86. Refer to exhibits on (1) scenario analysis and impact on NPV over Arutmin stake sale and (2) sensitivity on PT to CERC tariff order on Mundra, which is expected in Feb-14. Key downside risks are (1) a lower or zero tariff hike for Mundra (2) materialization of contingent liabilities and (3) equity dilution of Rs20bn through rights issue as per media reports (ET).

Source : Equity Bulls

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