Tata Power. CMP: INR111 TP: INR92 Neutral

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1 BSE SENSEX S&P CNX 17,749 5,382 Bloomberg TPWR IN Equity Shares (m) 2, Week Range (INR) 135/81 1,6,12 Rel. Perf. (%) 10/-5/-10 M.Cap. (INR b) M.Cap. (USD b) February QFY12 Results Update Sector: Utilities Tata Power CMP: INR111 TP: INR92 Neutral * Consolidated incl share of profit from KPC and Arutmin mines, Pre Exceptionals, Fully Diluted Standalone PAT lower than expected led by no dividend income: Tata Power (TPWR) posted standalone PAT of INR4.6b for 3QFY12. This includes INR2.7b of forex gain, adjusted for which PAT was INR1.8b. Our estimate of INR3.1b factored in dividend income of INR2b (booked in both 1QFY12 and 2QFY12 from mining HOLDCO), which was not booked in 3QFY12. Consolidated adjusted PAT in line with estimate: Reported consolidated PAT of INR2.9b includes forex gain of INR3.8b, deferred stripping cost write-off of INR6.9b and impairment of INR1.6b at Mundra UMPP SPV. Adjusted for these, consolidated PAT was INR5.5b, largely in line with our estimate of INR4.8b. The deferred stripping cost write-off pertains to change in stripping ratio owing to geological surprises, which impacted the contribution from mining companies. Robust core profit of coal SPVs negated by write-off: Coal production at Bumi stood at 18.6m tons (v/s 17.5m tons in 3QFY11) and realization was USD95/ton (v/s USD75/ton in 3QFY11). Production cash cost increased 10% YoY to USD41/ton, leaving gross contribution at USD54/ton, up from USD49/ton in 2QFY12 and USD36/ton in 3QFY11. However, EBIT from coal SPVs was just INR1.4b as against INR4.3b in 3QFY11 and INR6b in 2QFY12. In 3QFY12, a charge of INR6.94b in the KPC mines due to change in strip ratio following geological surprises negated the contribution from mining companies. Marginally upgrading estimates; maintain Neutral: We expect TPWR to report consolidated net profit of INR19.8b for FY12 (up 13% YoY; v/s INR18.8b earlier), and INR20.2b in FY13E (up 2% YoY; v/s INR18.9b earlier). The stock trades at 13x FY13E EPS. Maintain Neutral with a target price of INR92. Nalin Bhatt (NalinBhatt@MotilalOswal.com) Satyam Agarwal (AgarwalS@MotilalOswal.com) / Vishal Periwal (Vishal.Periwal@MotilalOswal.com)

2 3QFY12 standalone PAT lower than estimates led by no dividend income: Tata Power reported 3QFY12 standalone revenues of INR22.5b (up 36% YoY), EBITDA of INR4.8b (down 43% YoY), and PAT of INR4.6b. Reported PAT is boosted by forex gain of INR2.7b. arising out of change in accounting policy by adopting AS-11, leading to reversal of forex losses booked in 1HFY12. AS-11 adoption would mean that losses in carrying value of Assets/LT liabilities (FCCB and Euro Bonds) would now be adjusted to useful life/debt repayment schedule, as the case may be. Adjusted for the same, the PAT stood at INR1.84b, lower than our estimate of INR3.1b. Deviation is largely on account of lower other income as we had assumed company to repatriate dividend from mining HOLDCO to standalone entity of INR2b. In 1Q and 2QFY12 numbers, TPWR had income of INR2b each on this account. Given that TPWR had given in-principal approval to lenders to transfer 75% of Holding in mining company to Mundra UMPP SPV to support losses, we had assumed continued dividend income. This is however postponed as the actual transfer is likely to be decided by end FY12. Merchant sales for the quarter stood at 218MUs only out of Haldia, as Unit-8 Trombay (100MW) is shifted on regulated mechanism. Realisations for Haldia stood at INR3.37/unit vs INR2.35/unit YoY. Consolidated adjusted PAT in-line with estimates: For 3QFY12, TPWR reported consolidated profit of INR3b. The reported numbers however includes several adjustments, Viz. 1) INR6.5b of deferred stripping cost write-off, 2) Forex gain of INR3.9b (adoption AS-11, as explained above) and 3) INR1.62b impairment loss owing to AS-11 in Mundra UMPP SPV. Adjusted for this, the consolidated net profit works out to INR5.5b, largely in-line with our estimate at INR4.8b. Also, the consolidated PAT was partly driven by US$88m of dividend income booked by TPWR in mining HOLDCO, received from KPC/Arutmin mines. We understand that TPWR has paid ~10% withholding tax towards the same in Indonesia. 13 February

3 Robust core profit of coal SPVs, negated by write-off During 3QFY12, Tata Power's share of revenues from coal mining companies (KPC/ Arutmin) stood at INR27b (up 61% YoY). Coal production stood at 18.67m tons (vs 17.5m tons), and realizations at USD95/ton (vs US$75/ton YoY). Sales volume for the quarter stood at 17.5m tons, vs 16m ton YoY. Production cash cost increased 10% YoY to USD41/ton, leaving gross contribution at USD54/ton, up from USD49/ton in 2QFY12 and USD36/ton YoY. However, EBIT from Coal SPVs in 3QFY12 stood at mere INR1.4b, vs INR4.3b YoY and INR6b QoQ. This is owing to a charge of INR6.94b in the KPC mines owing to change in strip ratio owing to geological surprises, negating the contribution from the mining companies. Operational / financial performance of mining companies 3QFY12 3QFY11 Chg (%) 2QFY12 1QFY12 Operational Details Production (m tons) Sales (m tons) Realisation (USD/ton) Cash cost of production (USD/ton) Financial Details Revenues (INR m) 27,007 16, ,673 19,907 EBIT (INR m) 1,353 4, ,962 7,501 Source: Company/MOSL Subsidiary/Associate companies performance North Delhi Power (51% stake) reported 3QFY12 net profit of INR304m, marginally lower compared to INR348m, possibly owing to certain under recoveries. DERC has now allowed Fuel Adjustment Charge and management indicated that there are no major under recoveries (just breaking even) Powerlinks Transmission (51% stake) reported PAT of INR208m, flat YoY, while Tata Power Trading Company (100% stake) reported PAT of INR40m in 3QFY12, vs INR6m YoY on the back of robust volume growth. Financials of subsidiaries/associate companies (INR m) 3QFY12 3QFY11 Chg (%) 2QFY12 1QFY12 North Delhi Power Revenues 10,614 7, ,274 12,057 Net Profit Powerlinks Transmission Revenues Net Profit Tata Power Trading Revenues 4,898 2, ,942 6,621 Net Profit Source: Company/MOSL 13 February

4 Status Update on the projects under construction Mundra UMPP: Tata Power is in final leg of commissioning Unit-I and has completed steam blowout for Unit-II while synchronization is expected soon. Entire BoP for the plant is ready and Unit III to V is expected to commission with gap of 4 months. Maithon project: Company has commissioned Unit-I and has completed steam blowout for Unit-II, Unit-II synchronization is expected in 4Q and commercialization expected in 1QFY13. Management shared construction of sidings for Unit-II is as per schedule and land acquisition for the work is bit delayed. Dagchu HEP: Management shared tunneling work is bit delayed and only 5.3kms of tunneling is now completed. Project CoD is targeted by CY14. Naraj Marthapur project: Tata Power is planning to convert the projects into gas based project, as the project is in proximity to KG-D6 gas block. It has received approval from the State government for the same. In order to harness the mandakini coal block, Company is looking for new project site. Mandakini mine land acquisition is under progress with 1st level of environment clearance received. Marginally upgrading estimates, tax incidence on dividend could significantly impact earnings/valuations, Neutral During 3QFY12, TPWR has not booked any dividend income in standalone operation from Mining SPV, vs INR2b each booked in 1Q and 2QFY12. Stake transfer to the tune of 75% of investment in Mining HOLDCO to Mundra UMPP SPV would mean additional inflow in the form of dividend, which would help meet commitment on debt front. However, this would mean that TPWR would continue to pay higher taxes on dividend distribution. We have currently not considered the dividend inflow and tax on the same in our earnings/valuations. Thus, the transfer (possibly by end FY12, currently only inprincipal approval) could impact earnings and valuations sizably. We currently expect TPWR to report consolidated net profit of INR19.8b for FY12 (up 13% YoY, vs INR18.8b earlier), and INR20.2b in FY13E (up 2% YoY, vs INR18.9b earlier). Stock trades at P/E of 13x on FY13E basis. Maintain Neutral (TP of INR92/ sh). 13 February

5 Tata Power: an investment profile Company description The Tata Power Company Limited (TPC) is India's largest private sector power generating company with an installed capacity of ~3GW. It has merchant power portfolio of 200MW of the current installed capacity. TPWR's operational capacity is expected to increase from ~3.GW in end FY10 to 8.2GW in FY13, an increase of ~3x. Additionally, company is working on project development of 6.2GW, of which 1.5GW of projects are based on captive coal blocks. Key investment arguments Equity funding requirement for entire 5.2GW of projects under construction largely met. Returns on these projects are capped and thus provide limited upside. Share of profit from KPC/Arutmin mines contributes ~50% of consolidated net profit and thus, sensitivity of USD1/ton variance in coal realizations in FY11E and FY12E is 2%. Future growth in capacity from projects under development (6.2GW) could be equity dilutive. Key investment risks Mundra UMPP project plus investment in KPC/ Arutmin mines is valued at Rs20/sh (20% of SOTP value). Near term earnings sensitive to merchant price movement. Recent developments Tata Power has written to MoP for tariff revision for Mundra Project and need to be seen that how this issue would be dealt by government and beneficiaries. Tata power is in final leg of commissioning Unit-I of Mundra UMPP and has completed steam blowout for Unit-II and synchronization is expected soon. Valuations and view We currently expect TPWR to report consolidated net profit of INR19.8b for FY12 (up 13% YoY, vs INR18.8b earlier), and INR20.2b in FY13E (up 2% YoY, vs INR18.9b earlier). Stock trades at P/E of 13x on FY13E basis. Maintain Neutral (TP of INR92/sh). Sector view CPSUs are our preferred sectoral theme, given acceleration in earnings growth and comfortable valuations. We are Neutral on private IPPs, given our cautious view on merchant prices. We believe that SEB finances will witness a gradual improvement going forward. EPS: MOSL forecast v/s Consensus (INR) MOSL Consensus Variation Forecast Forecast (%) FY FY Target Price and Recommendation Current Target Upside Reco. Price (INR) Price (INR) (%) Neutral Stock performance (1 year) 150 Tata Power Sensex - Rebased Shareholding Pattern (%) Dec-11 Sep-11 Dec-10 Promoter Domestic Inst Foreign Others Feb-11 Ma y-11 Aug-11 Nov-11 Feb February

6 Financials and Valuation 13 February

7 N O T E S 13 February

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