Hold Tata Power

Tata Power
Hold
Price: Rs1,323 Target Price (Mar 11): Rs1,270

1H FY10 Consolidated Results

* Consolidated Sales flat; PAT at Rs3.8 bn: Tata Power (TPC) reported
Sep qtr consolidated profits at Rs3.8 bn (down 29.3% YoY) on lower
exchange gains (Rs287 mn in 2Q10 vs. Rs764 mn in 2Q09) and higher tax
provisioning at 38.8% (vs. 16.4% in 2Q09). Higher taxes were on account
of higher MAT provisioning for NDPL (partly includes 1Q provisions) and
under-provisioning in coal assets last year (in 2Q09). Revenues remained
flat YoY at Rs45.6 bn despite higher volumes in coal business and
translational gains (+13.5% exchange rate movement in 2Q FY10). For
1H10, reported PAT grew 19.4% YoY on back of 6.7% YoY sales growth
and 500 bps improvement in EBITDA margins (due to lower fuel cost).

* Coal Sales volumes up 23%; ASP down 29% to US$57.9/MT: TPC
reported 6.8% de-growth in coal segment sales with 390 bps decline in
margins to 30.1%. The margins declined despite 13.5% currency gains and
record 23% YoY gain in volumes (to 15.4 MT), as sale price declined
sharply to $57.9/MT (29.4% lower YoY). Volumes were up 23% YoY as the
weather conditions were favorable. Cash cost of production was also
reduced to US$31.1/MT (-19.6% YoY). Coal SPVs reported $9 mn profits
for the quarter (post- interest repayment for acquisition debt) vs. $5 mn
loss in 2Q09. Outstanding debt as of Sep’09 is $740 mn with a cash
balance of $100 mn. Management guided for effective tax rate of 35-40%
(we have built 40%) as management fees remains tax deductable.

* Subsidiaries performance: NDPL (delhi distribution business) recorded
41% YoY growth in sales but its PAT declined 32%, primarily due to extra
provisioning of tax given higher MAT rate. Powerlinks, almost doubled its
profits to Rs206 mn as its sales grew 34.5% to Rs751.1 mn, on account of
new CERC norms as well as higher capitalization in 2Q10 (Rs63.2 mn
benefit). Tata Power Trading registered 1% sales growth and 8% PAT
growth despite 27% YoY increase in volumes (to 807 MU) traded, as the
average tariffs declined 20% YoY to Rs5.6/kWh from Rs7.1/kWh.

* Lower TP to Rs1,270; maintain Hold: While we reduce Coal ASP for
CY09 to $62/MT (inline with Bumi’s guidance) and lower merchant tariffs to
Rs5.5 (from Rs6.5/kWh earlier), we have tried to capture merchant upsides
from 450 MW (out of Reliance Infra’s 500 MW PPA expiring by Mar’10) by
giving 40% ROE to proportionate regulated equity for MLA (Rs12.5 bn).
Lower ASP for coal leads to Rs70 decrease in our valuation of coal assets to
Rs333/share. Adjusting for $300 mn FCCB dilution, our new TP at Rs1,270
(for Mar’11) offers 4% downside (see Exhibit 5) from current levels.
Maintain Hold.