Tata Power - Rating Revision - Centrum 13082014

8/11/2019 Tata Power - Rating Revision - Centrum 13082014

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Compensatory tariff may get delayed; cautiously optimisticWe upgrade Tata Power to Hold and retain our PT of Rs85. The sharp decline in

stock price after our anti-consensus Sell rating in May-14, prompts us to upgrade itto Hold. Our valuation factors-in (1) Recovery of compensatory tariff (CT) as perCERC order, but we highlight that a scenario of zero tariff hike drags fair price toRs59; (2) stake sale in Arutmin mine by Q4FY15. Although its promoter BUMI facessevere financial crisis, we extend optimism based on Management commentary; (3)balance sheet deleveraging and (4) jump in overall earnings, although consistentcost and tax adjustments primarily in coal business, makes us cautious.

Mundra UMPP update: APTEL in its interim order in Jul-14 directed SEBs to pay CTfrom Mar-14 vs CERC’s order which directed payment of CT from Apr-12. But, ourchannel checks reveal that SEBs have resisted payment of CT and await final APTELorder (expected on 19 Aug 14), post which either a resolution or protracted litigationmay ensue. TPC has clarified that it would decide on accounting of CT once clarityemerges on recovery of CT. We are cautiously optimistic and have extended

optimism and built-in CT as per CERC’s order. Although a scenario of zero tariff hike isunlikely, we highlight that as per our sensitivity analysis, such a scenario would implya fair target price of Rs59. Alternatively, if SEBs agree for Rs0.3 tariff hike, it beingmatched with the L2 bid, our PT would drag toRs68.

Earnings snapshot: EBITDA, on a like-to-like basis adjusted with diminution in valueof investments by Rs32mn and adverse tariff impact of Rs0.7bn, stood at Rs18.4bn (-11% YoY and -4%QoQ). PBIT for coal business at Rs2.6 bn (-45% QoQ) draggedearnings with decline in coal realizations and consequent dip in margins. Dip in coalrealization is due to change in strategy to mine low calorific coal. PBIT for powerbusiness at Rs9.6 bn (+22% QoQ) was up as there were no exceptional cost items.PAT was below our and street estimates primarily owing to non-accounting of CT,adverse tariff adjustment ofRs0.7bn, lower coal realizations and lower depreciation ofRs1bn which however off-sets higher deferred taxes of Rs1.1bn.

Outlook : Outcome of CERC’s decision on tariff and its implementation will be a keyvariable to watch out for in addition to receipt of cash on Arutmin stake sale andconsequent balance-sheet deleveraging in FY15. We extend optimism and estimate TPC to be FCF positive from FY15E onwards, backed by subdued capex cycle, recoveryof CT with retrospective effect, healthy cash flow from coal business and regulated 16%returns from nearly half its generation capacity.

Valuations and key risks: We value individual projects/businesses either using the

DCF or assigning a multiple to its book value, to arrive at our PT of Rs85. Keydownside risks are (1) low or zero tariff hike for Mundra and (2) materialization ofcontingent liabilities.

Y/E Mar – Consolidated (Rs mn) Q1FY15 Q1FY14 YoY (%) Q4FY14 QoQ (%) Q1FY15E Var (%)

Net sales 87,389 92,918 (6.0) 88,052 (0.8) 94,997 (8.0)

EBITDA 17,748 20,668 (14.1) 18,215 (2.6) 19,834 (10.5)

EBITDA margin (%) 20 22 (8.7) 21 (1.8) 21 (2.7)

Net Income (1,539) (1,590) (3.2) (1,884) N/m 2,910 NM

Operating Metrics:

Coal Production - KPC & Arutmin (MT) 22.6 20.0 13.0 22.1 2.3 20 13.0

Coal Sales - KPC and Arutmin (MT) 21.7 20.5 5.9 22.1 (1.8) 20 8.5

FOB realisation (USD/tonne) 47.0 66.0 (28.8) 55.0 (14.5) 61 (23.0)

Cash cost of mining (USD/tonne) 31.5 42.0 (25.0) 35.0 (10.0) 45 (30.0)

Source: Company, Centrum Research

Target Price Rs85 Key Data

CMP* Rs91 Bloomberg Code TPWR IN

Downside 7% Curr Shares O/S (mn) 2,704.6

Previous Target Rs85 Diluted Shares O/S(mn) 2,704.6

Previous Rating SELL Mkt Cap (Rsbn/USDbn) 247.1/4

Price Performance (%)* 52 Wk H / L (Rs) 115.6/67.3

1M 6M 1Yr 5 Year H / L (Rs) 138.5/64.9

TPWR IN (10.4) 26.0 25.5 Daily Vol. (3M NSE Avg.) 8861271

NIFTY 3.6 27.0 37.7

*as on 12 August 2014; Source: Bloomberg, Centrum Research

Shareholding pattern (%)

Jun-14 26-Apr-14 Mar-14 Dec-13

Promoter 33.0 33.0 32.5 32.5

FIIs 28.6 25.8 26.0 26.0

Dom. Inst. 22.9 22.5 22.3 22.5

Public & Others 15.4 19.0 19.2 19.0

Source: BSE

Coal business - PBIT earnings and cash receipts

0.0

1.0

2.0

3.0

4.0

5.0

-100%

-50%

0%

50%

100%

150%

1 Q F Y 1 3

2 Q F Y 1 3

3 Q F Y 1 3

4 Q F Y 1 3

1 Q F Y 1 4

2 Q F Y 1 4

3 Q F Y 1 4

4 Q F Y 1 4

1 Q F Y 1 5

Cash receipts from coal business (Rs b n) RHS

Change in PBIT

Source: Company, Centrum Research

Centrum vs. Bloomberg Consensus*

Particulars(Rs bn)

FY15E FY16E

Centrum BBG Chg (%) Centrum BBG Chg (%)

Revenue 383.5 376.4 1.9 377.0 391.8 (3.8)

EBITDA 84.6 86.1 (1.7) 90.6 88.3 2.6

PAT 18.4 17.6 4.3 22.0 20.0 9.9

*as on 12 August 2014; Source: Bloomberg, Centrum Research

Bloomberg Consensus CentrumTargetPrice(Rs)

Variance(%)BUY SELL HOLD

TargetPrice (Rs)

22 7 10 107 85 (20.3)

Source: Bloomberg, Centrum Research Estimates

Sachin Mehta, [email protected]; 91 22 4215 9854

Y/E Mar (Rs bn) Revenue YoY (%) EBITDA EBITDA (%) APAT YoY (%) Adj.DEPS Rs. RoE (%) RoCE (%) Adj. P/E (x) P/B(x)

FY13 330.3 27.0 64.4 19.8 7.6 7.3 3.2 7.5 0.8 28.4 1.7

FY14 356.5 7.9 77.1 21.7 (2.6) NM (1.1) (0.3) (0.3) NA 1.9

FY15E 383.5 7.6 84.6 22.4 18.4 NM 6.8 13.9 6.9 13.5 1.7

FY16E 377.0 (1.7) 90.6 24.5 22.0 19.7 8.1 14.1 8.3 11.2 1.5

FY17E 399.3 5.9 91.6 23.4 22.8 3.7 8.4 13.2 8.6 10.8 1.4

Source: Company, Centrum Research Estimates

Power Hold

Rating Revision 13 August 2014

INDIA

Tata Power


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3 Tata Power

Quarterly financials, Operating Metrics and Key Performance Indicators

Exhibit 6: Quarterly Financials

Particulars (Rs mn) Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15

Net Sales 76,495 89,917 89,973 92,918 87,171 86,561 88,052 87,389

Other operating income 503 476 352 477 476 439 393 268

Fuel Cost 24,328 26,958 24,224 27,899 24,700 23,069 23,289 25,858Cost of Power Purchase 17,926 21,998 21,657 19,921 20,037 16,354 17,650 19,194

Coal processing charges 6,317 7,011 6,187 6,773 6,078 7,335 6,645 6,834

Deferred stripping cost - - - - - - - -

Total operating expenses 61,904 71,846 71,771 72,727 67,340 69,135 70,230 69,909

EBITDA 15,093 18,547 18,554 20,668 20,307 17,865 18,215 17,748

Depreciation 5,420 5,873 4,164 6,508 6,891 6,655 7,242 5,425

Interest 6,229 7,403 7,242 9,025 8,029 8,750 8,586 9,345

Other Income 685 110 395 (2,279) (2,929) (941) 531 (507)

PBT 4,128 5,382 7,543 2,857 2,458 1,518 2,917 2,471

Tax 2,225 2,299 4,992 3,346 1,254 1,656 3,828 3,138

Exceptional items (2,500) (6,000) - - - - - -

RPAT (597) (2,918) 2,550 (490) 1,204 (137) (911) (667)

Minority Int. / Profit share of Asso. (241) (371) (737) (657) (455) (612) (543) (446)

Interest on perpetual debt/Others 823 460 437 443 465 431 431 426

Net Income 839 2,250 1,376 (1,590) 284 (1,180)** (1,884)** (1,539)

YoY Growth (%)

Net Sales 15.1 25.4 25.5 29.1 14.0 (3.7) (2.1) (6.0)

EBITDA 50.5 27.0 27.1 46.3 34.5 (3.7) (1.8) (14.1)

Margins (%)

EBITDA 19.7 20.6 20.6 22.2 23.3 20.6 20.7 20.3

APAT 1.1 2.5 1.5 (1.7) 0.3 (1.4) (2.1) (1.8)

Key operational parameters

Coal Production (MT) – KPC and Arutmin 19.4 22.9 19.6 20.0 21.7 19.2 22.1 22.6

Coal Sales (MT) – KPC and Arutmin 15.5 20.7 19.0 20.5 19.0 23.4 22.1 21.7

FOB realisation (USD/tonne) 78.4 71.6 72.3 66.0 62.0 58.0 55.0 47.0

Cash cost of mining (USD/tonne) 45.5 41.3 44.3 42.0 37.7 37.4 35.0 31.5

Segment Revenue

Power 54,885 64,033 65,002 68,937 63,929 59,628 59,829 65,160

Coal 20,568 24,640 22,191 21,841 23,235 25,676 24,149 20,914

Others 2,509 2,959 3,920 3,238 2,939 4,961 6,632 4,107

Less: Inter segment revenue (964) (1,240) (788) (621) (2,457) (3,264) (2,165) (2,523)

Total segment revenue 76,998 90,393 90,325 93,395 87,647 87,001 88,445 87,657

Segment Results (PBIT)

Power 7,174 9,665 13,466 13,035 8,840 10,438 7,809 9,555

Coal 2,902 3,109 1,707 962 2,151 169* 4,768 2,608

Others (166) (53) (144) (146) 94 285 (71) (213)

Segment Margin (PBIT) (%)

Power 13.1 15.1 20.7 18.9 13.8 17.5 13.1 14.7

Coal 14.1 12.6 7.7 4.4 9.3 0.7 19.7 12.5

Others (6.6) (1.8) (3.7) (4.5) 3.2 5.7 (1.1) (5.2)

Source: Company, Centrum Research; *We have considered the AEBIT adjusting f or MDO claims/cost at Arutmin of Rs2.5bn.**Differs from company reported NI as we adjust PAT with interest on perpetual bonds to derive NI in line with historical trend.

Exhibit 7: Key Performance Indicators

Assumptions FY13 FY14 FY15E FY16E FY17E

Mundra Tariff (Rs/kWh) 2.4 2.6 2.9 2.9 2.9

Units sold – Mundra (BU) 11.4 22.0 27.4 27.4 27.4

Coal sales – KPC and Arutmin (MT) 71.6 85 80 50* 50*

Coal realization (USD/tonne) 76 60 47 75 80

Cash mining cost – FOB (USD/tonne) 48.7 38 30 45 45

Source: Company, Centrum Research Estimate * Represents overall sales at KPC mine and excludes Arutmin mine post its likely s take sale



4 Tata Power

Financials (Consolidated)

Exhibit 8: Income Statement

Y/E March (Rsmn) FY13 FY14 FY15E FY16E FY17E

Revenues 3,30,254 3,56,487 3,83,461 3,77,048 3,99,295

Material consumed & Powerpurchase cost

2,12,480 2,22,559 2,38,405 2,27,654 2,43,255

% of revenues 64.3 62.4 62.2 60.4 60.9

Operating expenses 40,098 43,379 45,278 42,599 47,058

% of revenues 12.1 12.2 11.8 11.3 11.8

Employee Costs 13,230 13,494 15,153 16,217 17,356

% of revenues 4.0 3.8 4.0 4.3 4.3

EBITDA 64,447 77,056 84,626 90,578 91,626

EBITDA Margin (%) 19.8 21.7 22.4 24.5 23.4

Depreciation & Amortisation 20,517 27,296 27,544 29,159 29,253

EBIT 43,930 49,759 57,081 61,419 62,373

Finance expenses 26,355 34,390 27,700 28,957 28,725

Other Income 3,692 (5,619) 3,998 4,161 4,332

Exceptional item (8,500) - - - -

PBT 12,767 9,750 33,379 36,624 37,980

Provision for tax 11,780 10,084 15,021 14,650 15,192

Effective tax rate (%) 92 103 45 40 40

Reported PAT (855) (2,600) 18,359 21,974 22,788

Adjusted PAT (afterexceptional items)

7,645 (2,600) 18,359 21,974 22,788


Exhibit 9: Key Ratios

Y/E March FY13 FY14 FY15E FY16E FY17E

Growth Ratio %Revenues 27.0 7.9 7.6 (1.7) 5.9

EBITDA 31.5 19.6 9.8 7.0 1.2

Adj. Profit 7.3 NM NM 19.7 3.7

Profitability Ratio (%)

EBITDA Margin 19.8 21.7 22.4 24.5 23.4

PBIT Margin 13.5 14.0 15.1 16.6 15.9

PBT Margin 3.9 2.7 8.8 9.9 9.7

PAT Margin 2.9 (0.1) 4.9 5.9 5.8

Return Ratio (%)ROE 7.5 (0.3) 13.9 14.1 13.2

ROCE 0.8 (0.3) 6.9 8.3 8.6

ROIC 0.8 (0.4) 7.4 8.9 9.3

Turnover Ratio (days)

Inventory period 22.8 21.3 25.6 25.6 25.6

Debtors period 115.9 46.7 116.8 116.8 116.8

Creditors period 39.8 47.5 47.5 47.5 47.5

Net working capital 57.1 27.5 49.0 42.7 42.7

Solvency Ratio (x)

Debt-equity 3.0 3.3 2.2 1.8 1.5

Net debt-equity 2.5 2.9 1.8 1.4 1.2

Current Ratio 1.3 1.1 1.3 1.2 1.2

Interest coverage 1.8 1.3 2.2 2.3 2.3

Dividend

Dividend per share 1.2 1.3 1.2 1.2 1.2

Dividend pay-out (%) 35.7 (114.1) 18.4 15.4 14.8

Dividend yield (%) 1.3 1.4 1.4 1.4 1.4Per share (Rs)

Basic EPS (0.4) (1.1) 6.8 8.1 8.4

Fully diluted EPS - Adjusted 3.2 (1.1) 6.8 8.1 8.4

Fully diluted EPS - Reported (0.4) (1.1) 6.8 8.1 8.4

CEPS 8.3 10.4 17.0 18.9 19.2

Book value 52.7 49.4 55.2 61.1 67.3

Valuation (x)

P/E – Adjusted 28.4 NA 13.5 11.2 10.8

P/BV 1.7 1.9 1.7 1.5 1.4

EV/EBITDA 8.7 7.5 6.0 5.3 5.0

EV/Sales 1.7 1.6 1.4 1.3 1.2

Mcap/Sales 0.8 0.7 0.7 0.7 1.2


Exhibit 10: Balance Sheet


Equity Share Capital 2,373 2,373 2,705 2,705 2,705

Share Ap. Money Pend. Allot. - - - - -

Reserves 1,21,234 1,13,317 1,45,240 1,61,178 1,77,929Shareholders' fund 1,23,607 1,15,690 1,47,945 1,63,883 1,80,634

Debt 3,66,465 3,76,816 3,30,618 2,92,688 2,72,693

Minority Interest 20,646 22,733 24,433 26,133 27,833

Deferred Tax/non currentLiability

10,005 11,379 11,379 11,379 11,379

Total Capital Employed 5,20,724 5,26,618 5,14,375 4,94,083 4 ,92,539

Gross fixed assets 5,31,689 5,50,249 5,64,249 5,94,249 6,02,249

Accumulated depreciation (1,18,156) (1,45,453) (1,72,997) (2,02,156) (2,31,409)

CWIP 23,576 63,596 40,976 27,127 44,301

Net Fixed Assets 4,37,109 4,68,392 4,32,228 4,19,220 4,15,141

Investments 31,201 30,186 30,186 30,186 30,186

Inventories 20,265 20,733 26,412 25,930 27,451

Sundry Debtors 1,03,231 45,426 1,20,741 1,18,535 1,25,489

Cash & bank balances 19,899 15,550 35,420 28,411 30,078

Loans and advances 49,038 48,561 56,597 55,563 58,823

Other current assets 10,514 85,548 3,907 3,838 4,056

Total current assets 2,02,946 2,15,818 2,43,078 2,32,278 2,45,896

Current liabilities & prov. 1,52,090 1,89,093 1,92,431 1,88,916 1,99,998

Net current assets 50,856 26,725 50,647 43,362 45,898

Deferred Tax Asset/Others 1,558 1,315 1,315 1,315 1,315

Total Assets 5,20,724 5,26,618 5,14,375 4,94,083 4,92,539


Exhibit 11: Cash Flow


PBT 12,767 9,750 33,379 36,624 37,980

Total tax paid (8,410) (8,611) (15,021) (14,650) (15,192)

Depreciation 20,517 27,296 27,544 29,159 29,253

Chg in debtors (20,947) 57,805 (75,315) 2,206 (6,954)

Chg in inventory (3,418) (468) (5,679) 483 (1,521)Chg in loans & advances (11,741) 477 (8,037) 1,034 (3,260)

Change in other currentassets

(4,336) (75,034) 81,641 69 (217)

Chg in creditors (570) 10,703 2,940 (896) 2,825

Chg in other current liabilities 12,563 19,750 (1,863) (1,930) 6,084

Change in other non-currentliabilities

7,939 6,315 1,847 (689) 2,173

Net chg in working capital (20,510) 19,548 (4,466) 276 (869)

CF from op. activities (a) 4,363 47,983 41,436 51,409 51,172

Capital expenditure (54,499) (58,580) 8,620 (16,151) (25,174)

Chg in investments 3,028 1,016 - - -

CF from invest. activities (b) (51,471) (57,564) 8,620 (16,151) (25,174)

Debt and Equityraised/(repaid)

32,267 10,351 (26,264) (37,930) (19,995)

Dividend (incl. tax) (3,431) (3,236) (3,471) (3,885) (3,885)

Others 729 (1,882) (451) (452) (451)CF from fin. activities (c) 29,565 5,233 (30,186 ) (42,267) (24,331)

Net chg in cash (a+b+c) (17,543) (4,348) 19,870 (7,009) 1,667




5 Tata Power

Appendix A

Disclaimer

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6Tata Power

The opinions and projections expressed herein are entirely those of the author and are given as part of the normal research activity of Centrum Brokingand are given as of this date and are subject to change without notice. Any opinion estimate or projection herein constitutes a view as of the date of thisreport and there can be no assurance that future results or events will be consistent with any such opinions, estimate or projection.

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Centrum and its affiliates have not managed or co-managed a public offering for the subject company in the preceding twelve months. Centrum andaffiliates have not received compensation from the companies mentioned in the report during the period preceding twelve months from the date of thisreport for service in respect of public offerings, corporate finance, debt restructuring, investment banking or other advisory services in amerger/acquisition or some other sort of specific transaction.

As per the declarations given by them, Mr Sachin Mehta, research analyst and and/or any of his family members do not serve as an officer, director or anyway connected to the company/companies mentioned in this report. Further, as declared by him, he has not received any compensation from the abovecompanies in the preceding twelve months. He does not hold any shares by him or through his relatives or in case if holds the shares then will not to doany transactions in the said scrip for 30 days from the date of release such report. Our entire research professionals are our employees and are paid asalary. They do not have any other material conflict of interest of the research analyst or member of which the research analyst knows of has reason toknow at the time of publication of the research report or at the time of the public appearance.

While we would endeavour to update the information herein on a reasonable basis, Centrum, its associated companies, their directors and employees areunder no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent Centrumfrom doing so.

Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable

regulations and/or Centrum policies, in circumstances where Centrum is acting in an advisory capacity to this company, or any certain othercircumstances.

This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state,country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subjectCentrum Broking Limited or its group companies to any registration or licensing requirement within such jurisdiction. Specifically, this document doesnot constitute an offer to or solicitation to any U.S. person for the purchase or sale of any financial instrument or as an official confirmation of anytransaction to any U.S. person unless otherwise stated, this message should not be construed as official confirmation of any transaction. No part of thisdocument may be distributed in Canada or used by private customers in United Kingdom.

The information contained herein is not intended for publication or distribution or circulation in any manner whatsoever and any unauthorized reading,dissemination, distribution or copying of this communication is prohibited unless otherwise expressly authorized. Please ensure that you have read “RiskDisclosure Document for Capital Market and Derivatives Segments” as prescribed by Securities and Exchange Board of India before investing in IndianSecurities Market.

Rating Criteria

Rating Market cap < Rs20bn Market cap > Rs20bn but < 100bn Market cap > Rs100bn Buy Upside > 25% Upside > 20% Upside > 15%

Hold Upside between -25% to +25% Upside between -20% to +20% Upside between -15% to +15%

Sell Downside > 25% Downside > 20% Downside > 15%

Member (NSE, BSE, MCX-SX), Depository Participant (CDSL) and SEBI registered Portfolio Manager

Registration Nos.

CAPITAL MARKET SEBI REGN. NO.: BSE: INB011454239, NSE: INB231454233

DERIVATIVES SEBI REGN. NO.: NSE: INF231454233 (TRADING & SELF CLEARING MEMBER)

CDSL DP ID: 12200. SEBI REGISTRATION NO.: IN-DP-CDSL-661-2012

PMS REGISTRATION NO.: INP000004383

MCX – SX (Currency Derivative segment) REGN. NO.: INE261454230

Website: www.centrum.co.in

Investor Grievance Email ID: [email protected]

Compliance Officer Details:

Tel: (022) 4215 9413; Email ID: [email protected]

Centrum Broking Limited

Registered Office Address

Bombay Mutual Building ,

2nd Floor,

Dr. D. N. Road,Fort, Mumbai - 400 001

Correspondence Address

Centrum House

6th Floor, CST Road, Near Vidya Nagari Marg, Kalina,

Santacruz (E), Mumbai 400 098.

Tel: (022) 4215 9000

Documents

Tata Power - Rating Revision - Centrum 13082014