Tata Power trips on Mundra

Higher coal realisations or a meaningful rise in output from Indonesian mines could help partly offset the increase in costs for the Mundra UMPP.

Tata Power touched a 52-week low of Rs 995.2 on September 5, amid growing concerns about the impact of higher imported coal costs on its flagship Ultra Mega Power Project (UMPP) at Mundra in Gujarat’s Kutch district, after the change in mining laws by the Indonesian government. And, recent reports suggest the Gujarat government, which had signed to buy about 2,000 Mw from there, is not in a mood to pay the higher costs. Although the company is speaking to the Union government for a rate increase (as is Reliance Power for its UMPP in Andhra Pradesh), as well as planning other measures to mitigate the impact, the Street is not impressed.

According to analysts, the Mundra UMPP is expected to incur losses, given the current rate structure and new higher costs. However, part of the costs will be compensated by higher coal realisations, due to its stake in Indonesian coal mines. In this backdrop, analysts are cautious in the medium term, despite an 18 per cent correction witnessed last month. Some have even downgraded their price targets and ratings.

New rules
The Indonesian government recently implemented the Indonesian Coal Price Regulation, which requires prices for all transactions to be benchmarked against a set of international and domestic indices and all sale contracts to be modified retrospectively by September.

Mundra (capacity of 4,000 Mw), India’s first UMPP, is expected to be fully commissioned by 2012-13 (two units of 800 Mw each are expected to be commissioned by March 2012). It was awarded to Tata Power through competitive bidding, on a rate of Rs 2.26 per unit. It has a 10.11-million tonne annual coal supply contract with its Indonesian coal companies (30 per cent stake each in KPC and Arutmin), part of which would be used in Mundra UMPP. In the original coal supply contract, Mundra UMPP was to get 75 per cent of the coal at index-linked prices, while the balance 25 per cent was to be supplied at a lower price (about $40 per tonne), fixed for five years. After five years, the entire quantity would come at market prices.

With the change in mining policy, the fuel costs are expected to rise by about $30-40 per tonne and, hence, the project is estimated to incur losses if the company is unable to pass on the higher costs. Analysts peg the gross impact of this move on Mundra’s profitability at about $500 million over five years.

Meanwhile, the management has presented its case to the Indonesian government and has also asked the Union power ministry here to discuss the higher cost of coal with state electricity boards (SEBs). Analysts say the government is unlikely to intervene, as other private players would then ask for the same treatment. While the company is also looking at options such as blending cheaper low-calorific coal to rationalise the cost, the move could impact efficiency of the plant, say analysts.

However, all is not over for the company. Losses at Mundra would also be mitigated through better financial performance of the coal business, thanks to higher coal realisations. The net impact on the combined valuation of Mundra and the mines is around five per cent.
 

MUTED PROFIT GROWTH
In Rs crore	FY11	FY12E	FY13E
Net sales	19,451	23,263	28,069
Y-o-Y chg (%)	-	19.6	20.7
Operating profit	4,596	5,771	6,970
Y-o-Y chg (%)	-	25.6	20.8
Net profit	2,060	2,232	2,354
Y-o-Y chg (%)	-	8.4	5.5
E: Estimates                                     Source: Analysts Reports

Outlook
Analysts have cut their target share price estimates by 17 per cent (consensus average) to adjust for losses in Mundra. Some, like Morgan Stanley and HSBC, have also downgraded their ratings. The outlook in the medium term is cautious but can change if the company is able to raise the mine capacity from the current 60 mt to 100 mt earlier than 2012-13, as that would help compensate for losses at Mundra—in other words, nullifying the impact at the consolidated level. Also, the company will have to exhibit faster progress on projects under development (of more than 5,000 Mw). Else, there is no significant capacity addition expected for the next three to four years, besides under-construction projects. Any rate rise accepted by SEBs fully or partially or a favourable decision by the Indonesian government would be a significant positive trigger.