Why Analysts Repose Faith In Tata Power, The Worst Performer Among Peers In 2019

The average of analyst estimates compiled by Bloomberg suggest a potential upside of 36 percent in the next 12 months. As many as 12 out of the 17 analysts tracking the company recommend a ‘Buy’, four suggest ‘Hold’ and just one advises ‘Sell’. ICICI Securities and Edelweiss Capital have the target price of around Rs 87 on the stock—indicating an upside of 58 percent. Jefferies is the most bullish with a target price of Rs 90.

Here’s what could be going in Tata Power’s favour:

Acquisition Of Prayagraj Power Generation

Resurgent Power Ventures—a consortium comprising Tata Power, ICICI Bank Ltd. and two investors from Kuwait and Oman—completed the acquisition of 75 percent stake in Prayagraj Power Generation on Dec. 5.

The 1,980-MW plant, previously owned by real estate baron Manoj Gaur, was delayed over issues related to tariff revision. The Central Electricity Regulatory Commission fixed the tariff at Rs 3.02 per unit, and the plant has a power purchase agreement with the Uttar Pradesh for 90 percent of its generation.

The acquisition will add Rs 140-160 crore to Tata Power’s consolidated earnings, resulting in savings of Rs 100 crore, ICICI Securities said in a note. Addition of the plant to the company’s portfolio will also result in 15-17 percent internal rate of return for Resurgent Power, the brokerage said.

Power Distribution In Odisha

The Odisha Electricity Regulatory Commission, on Dec. 23, awarded a letter of intent to Tata Power for acquisition of its Central Electricity Supply Utility. The company distributes power to consumers in five circles in the eastern coastal state for 25 years.

The acquisition, Tata Power said in an exchange filing, would double its consumer base to 5 million.

Mundra Tariff Resolution

Tata Power is awaiting approval from states to increase tariffs for its 4,000-MW Mundra coal-fired power plant in Gujarat. The Central Electricity Regulatory Commission has allowed a hike after the company negotiated with states, accepting the suggestions of a high-powered committee set up by Gujarat.

While Gujarat approved an increase in tariff, it hasn’t decided on the quantum of hike. Maharashtra, Punjab, Haryana and Rajasthan are yet to announce an increase.

The Mundra projects of Tata Power and Adani Power Ltd. depend on coal imported from Indonesia. They turned unviable after the Southeast Asian nation increased the prices of coal for exports. Adani has already received the CERC approval for an increase in tariff for 2000 MW capacity against a 4,620 MW.

The Mundra plant will never be able to make a profit but the loss is expected to come down from Rs 1,700 crore last year to Rs 1,000 crore for the current fiscal year, Praveer Sinha, managing director and chief executive officer at Tata Power, told BloombergQuint in an interview. That’s because under-recoveries fell from 90 paise a unit to 50 paise this year due to fall in prices of coal imported from Indonesia, blending of coal has increased from 10 percent to 50 percent and the company has been able to source good quality coal at competitive rates through spot purchases, he said. If the tariffs are increased, the losses could halve, he said.

Swarnim Maheshwari, research analyst at Edelweiss Securities, wrote in a recent report that a 100 percent successful resolution would result in a Rs 900-1,000-crore increase in the company’s operating profit.

Tata Power had won the bid for Mundra project by quoting a tariff of Rs 2.26 per unit. A hike in the current environment could be Rs 0.35-0.4 per unit, factoring coal mining profit sharing for resolution of the Mundra plant, Edelweiss said.

According to India Ratings & Research, under-recovery of fuel costs would more than halve to around 40 paise per unit over the previous financial year in case the high-powered committee’s suggestions are accepted for Tata Power’s Mundra plant.

Fall In Imported Coal Prices

Even as Tata Power expects an increase in tariffs, prices of Indonesian coal have also fallen nearly 38 percent since August last year.

Both Adani Power and Tata Power stand to gain from higher recoveries due to falling imported coal prices for their plants in Mundra, according to Rupesh Shakhe, vice-president of research (power and renewables) at Elara Capital. Adani Power will benefit less as 70 percent its coal comes from Indonesia against Tata Power’s 100 percent.

Tata Power’s coal-fired plant in Trombay near Mumbai also depends on imports from Indonesia, according to its annual report. Lower prices will also benefit this plant.

Cheaper Than Peers

Tata Power’s price-to-book ratio is at a discount at 35 percent compared with its five-year average ratio, according to Bloomberg data. Peers, including JSW Energy Ltd., Adani Power Ltd. and CESC Ltd., trade at a premium.