Tata Power: Double whammy

Company could be hit by low merchant tariffs at home and higher payout for coal from its Indonesian mines.

A day after announcing results, Tata Power’s shares fell 4.3 per cent. The results are reflective of the operational risks faced by India’s power sector. The company, which had acquired coal mines in Indonesia to secure fuel for its ultra mega power project (UMPP) in Mundra, is now hit by the prospect of paying substantially higher for its imported coal, as the Indonesian government has recently decided to benchmark its coal prices to international indices.

According to analysts, at risk is the company’s fixed price ($40/tn) coal purchase contract with Bumi for Mundra UMPP, due change of law. Should the company fail to convince the Indonesian government to allow export of 2.5 mtpa at a fixed price for five years, it will have to shell out Rs 350 crore ($30/tn more to align with Index) for the Mundra UMPP. This may raise the project’s FY13E loss by 270 per cent, says Bank of America Merrill Lynch (BoAML).

The company’s topline growth in the first quarter was led by higher coal realisations ($94/tn, up 30 per cent year-on-year and 8 per cent sequentially), but was offset by a higher tax rate (55 per cent). Tata Power’s tax rate for Q1FY12 increased, as dividend from the Bumi mines rose 52 per cent sequentially to Rs 200 crore (dividend income taxed at 45 per cent). In addition, its deferred tax liability also increased on the commissioning of wind assets.

On the home front, the company sold 3.9 BUs during Q1FY12, compared to 4.5 BUs during Q1FY11. This was primarily due to discontinuation of power sales to R-Infra since April 2011, shutdown of Jojobera unit-1,2,3 and lower demand from Tata Steel. Merchant sales from Trombay Unit-8 (100 Mw) and Haldia (100 Mw) were 142 MUs and 221 MUs, against 178 MUs and 187 MUs, respectively. The average merchant realisation declined by 30 per cent y-o-y to Rs 4/unit, says IDBI Capital.

According to BoAML, the company’s near-term growth (FY12E) in core business is driven by a shift in its business model to add the merchant power being freed from regulatory business, profitability in which may not be sustainable. As Tata Power executes its delayed capex over FY10-13E, returns on equity could be hit. The stock trades at FY12E P/BV of 2x due to merchant power and a rally in coal stocks.