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In a recent development, the state electricity regulator approved a 25 per cent rate rise (in FY14) for the Mumbai region. It has come as a positive development for companies like Tata Power, a leading company with 1,800-2,000-Mw capacity in the city.
This also means Tata Power will be able to recover its dues. The move will also improve its cash flow and reduce interest cost. That apart, expectations are that for its 4,000-Mw Mundra Ultra Mega Power Project (UMPP) the company could soon get rate revisions, key to its performance in the coming months. "Rate relief at the 4,000-Mw Mundra project and earnings from the 1,000-Mw Maithon project will provide potential for upside after a loss in FY13,” said Arun Kumar Singh of HSBC Securities and Capital Markets in a note.
Concerns in the price
In FY13, the company reported loss, which led to significant downgrades of the stock. Apart from the issue of Mundra project, which was reflecting in the share prices, analysts started worrying about the coal business which saw its operating margins fall from 30.3 per cent in FY12 to 11.4 per cent in FY13.
Since the business accounted for 55 per cent of its consolidated net profit, it impacted earnings and led to correction in share price.
Further, rating agency Moody’s has changed its rating outlook for the company from ‘stable’ to ‘negative’ on account of expiry of certain debt covenants associated with its Mundra UMPP. Analysts believe this will impact the company’s ability to raise more funds, especially foreign funds.
While these events had a negative impact on its share price, analysts now believe valuations have turned attractive. At the current price of Rs 88, the stock is trading at 1.4 times its consensus estimated book value, which is low historically. “On our FY15 estimated earnings per share forecast of Rs 8.6 a share, Tata Power is trading at PE of 9.4 times, attractive compared with its history and peers," said Arun Kumar Singh.
Scope for improvement
The worst seems behind. The coal business is expected to recover in FY14 and Mundra project, too, could stabilise. Thus, most analysts are expecting a better show in FY14 and FY15. Tata Power holds 30 per cent stakes in two companies owned by Indonesia-based Bumi Resources.
Their coal mines produce 70 million tonnes a year. In the coal business, the realisations are expected to stabilise at $76-78 a tonne compared with average realisations of $75 a tonne in FY13. Stability in the business is important to protect the overall profitability.
For instance, Axis Capital, which has a target price for the stock at Rs 100 a share, said in its report that if the Central Electricity Regulatory Commission allows full pass-through of fuel cost, its target price will increase by 30 per cent. That apart, its 1,000-Mw Maithon project is expected to report profits. Last year, this project suffered because one client cancelled its power purchase agreement, rendering 300 Mw idle.
