Impairment charges of Rs 600 crore and a forex hit of Rs 86 crore severely dented Tata Power’s performance in the third quarter ended December 2012, with the company reporting a net loss of Rs 329 crore as against a net profit of Rs 298 crore in the previous corresponding period.
This is the second impairment charge Tata has taken due to its 4,000-megawatt power plant based on imported coal. It took an impairment of Rs 1,800 crore in the last financial year. The ultra mega power project (UMPP) became unviable after the home country of Tata's coal source, Indonesia, changed its regulations, driving up its fuel costs.
Consolidated net sales, however, registered an increase of over 35 per cent to Rs 8,991.7 crore in the recently concluded quarter, as compared to Rs 6,645.9 crore in the corresponding period last fiscal.
So, what should you do with the stock now? Is the company likely to report a similar performance in the next few quarters?
Says Karvy Research in a note, “Tata Power is negotiating with its customers for tariff revision due to changes in Indonesian law. The Company has filed petition with the CERC for revision in tariff for Mundra. We believe that the Mundra UMPP has been a big overhang for Tata Power in terms of profitability, and any positive step can lead to improvement in projects viability.”
“At the current market price, as the stock trades at 7.4xFY14E EV/EBITDA and 1.8x FY14E P/BV, we believe many negatives have already factored in the price. We reiterate our BUY recommendation on with revised target price of Rs 119 (Rs 122) per share, implying 21 per cent upside from the current levels,” it adds.
“We continue to like TPL's core distribution business (both Mumbai and Delhi) which earns a stable return and is insulated from risks of deteriorating financial health of SEBs. Further, potential blending of low-grade coal could bring down losses at Mundra. If the courts rule in favour of a tariff hike, it could be a significant positive for the company. Maintain ACCUMULATE with revised target price of Rs 106 (based on SOTP),” points out Sanjeev Zarbade, an analyst with Kotak Securities in a report.
"We believe that the Company’s massive power capacity addition and diversified business model will drive its growth going ahead. However, in near term higher fuel prices due to regulation on Indexation of Indonesian coal, tariff issue of UMPP and depreciation of Rupees will be key concern for the stock. In our view, valuations are already factoring all negatives and any positive on tariff issue on UMPP would be key catalyst for the stock. We maintain our Buy rating on the stock with target price of Rs. 125," observes an IndiaNivesh Securities report.
