No upside for Tata Power despite Mundra tariff rise

Tata Power's consolidated FY14 profit is likely to be Rs 2,400 cr

The Tata Power stock got some relief on Tuesday after CERC gave the nod to raise tariff for the company’s 4,000-Mw Mundra-based ultra mega power project (UMPP). However, analysts believe due to the limited impact of rate increase on current valuations, there is limited upside for the stock.

In the most likely case, the company might be allowed to hike tariff to the extent that it will take care of the losses being incurred by the project and avoid erosion in its net worth, thus making the project operationally viable. Rate increase will only add to the extent of Rs 4-5 per share to valuations.

In a note, Vanugopal Garre of Barclays Capital said, “We believe that in case the compensatory tariff is allowed with a guiding principal that there should be no loss and only 30 per cent of the fuel being sourced by Mundra UMPP should be considered as that being supplied by its own mines, our value for this project would increase to only Rs 0.1 per share.”

Earlier because of Mundra project, most analysts were putting a negative value of about Rs 4-5 per share to their overall stock valuation estimates of Tata Power, which ranges Rs 90-100 per share. In case rates are increased according to expectations, the negative value will get set off and valuations will go up to that extent (Rs 4-5 per share). Not surprisingly, the share price of Tata Power saw marginal gains of 2.2 per cent before closing at Rs 96.15 on Tuesday.

Tata Power has so far infused Rs 4,141 crore as equity in this project, which most analysts assign nil value in their estimates of the company. But, positively, if there are no losses on account of the Mundra project, it would boost the company’s consolidated profitability. For instance, if tariff is not hiked, Mundra project would have dented consolidated profits of the company by about Rs 700 crore in FY14, estimate analysts.

Excluding losses at Mundra, Tata Power’s consolidated profit in FY14 is expected to be  Rs 2,400 crore.  Apart from Mundra UMPP, Tata Power has a strong presence in power generation and distribution (in Mumbai and Delhi circles), coal mining (Indonesia based Bumi mines) and some valuable investments in group companies (telecom sector, etc). Analysts say, even at 10 times valuation, the market capitalisation works out to Rs 24,000 crore as against the current Rs 22,800 crore. They ascribe the lower PE to lack of significant growth in the existing businesses. Beyond 2014, there is no major capacity expected to go on stream and next year onwards the production from Indonesian mines will also reach the desired capacity level of about 100 million tonnes.

On the other hand, there are risks related to global coal prices, exchange rates and regulatory uncertainty. Even on price-to-book value basis, the stock is currently trading at 1.8 times its FY12 book value, which leaves limited room for gains. The upside, however, could come if there is complete pass through of costs along with assured return on equity for the Mundra project, for which the tariff hike needs to be to the tune of Rs 0.60 per unit on the quoted levelised tariff of Rs 2.26 per unit.