Tata Power –Neutral- Motilal Oswal

Over FY10-12, we expect Tata Power‘s consolidated earnings to increase from Rs14.8 billion in FY10 to Rs25.1 billion in FY12 (CAGR of 30%). But a very meaningful part of the increase will be driven by commodity earnings, given that Tata Power is net long on coal by 16-18mt a year. The contribution of commodity earnings to consolidated profitability rose from 9% in FY08 to 44% in FY10 and we expect this to increase to 61% in FY12.

Given the competitive tariff bid and increased imported coal prices over past three years (from $35-40/t in 2007 to $70-75/t currently), we expect the Mundra UMPP to post meaningful losses. The initial unit is expected to be commissioned in September 2011 and the entire 4GW capacity by early FY14. Year one quoted tariffs are Rs1.9/unit and given permissible escalations, we calculate the applicable tariff at Rs2.15/unit, resulting in annual losses of Rs9.5b on full commissioning in FY14.

After commissioning of the Mundra UMPP, the profitability of the chain (coal mining + Mundra UMPP) will fall from Rs15.7b in FY12 to Rs9.8b in FY14. But the RoE in the chain will continue to be robust at 18-21%, though lower than Approx 28% expected in FY12.

We expect TPWR to commission 5.5GW capacity until FY14, including the Mundra UMPP (4GW) and Maithon (1GW) where off-takes have been tied up. Merchant capacity for Tata Power is 220MW (already commissioned), which would be just 3% of the operational capacity by the end of FY14. Incremental project pipeline is 6.9GW, of which 1.3GW, is based on captive mines. For other capacities, fuel sourcing is yet to be tied up.

We have downgraded our earnings estimate for TPWR to factor in lower other income, interest on excess debt to fund equity contribution etc. We now expect TPWR to post consolidated PAT of Rs19.7b in FY11 (a downgrade of 6%) and Rs25.4 billion in FY12 (a downgrade of 10%). We arrive at an SOTP-based price target of Rs1,267. We believe meaningful losses in Mundra UMPP project will impact TPWR’s consolidated profit growth over FY13-15, given that the new project pipeline is in initial stages. Maintain NEUTRAL.

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