Event update: Tata Power (Outperformer) - Relief in Adani case spells hope for Tata Power

Event update

Central Electricity Regulatory Commission (CERC), the apex regulator, has provided huge relief for Mundra power projects, while a similar case of Tata Power Mundra awaits approval from all procurers except Gujarat

Details

• Mundra power plant (4GW), operating under a subsidiary, is facing huge under recovery due to increase in coal prices as the Indonesian government directed aligning the price of coal with international prices under existing coal supply agreement since September 2010. The power plant has a common power purchase agreement (PPA) with Gujarat (1.8GW), Maharashtra (760MW), Rajasthan (380MW), Punjab (475MW) and Haryana (380MW).
• To address this vexed issue for Adani Power, Tata Power and Essar Power, the Gujarat government formed a high-powered committee. Based on committee recommendations, the Gujarat government allowed amendment to Adani Power’s PPAs but held that of Mundra UMPP (Tata Power) in abeyance until the amended PPA was approved and signed by the other four states.
• CERC has now approved Adani Power’s new modified PPA. Being similar cases, Tata Power too is expected to get a relief from CERC, post approval from the other four states.
• Key features of the proposed amended PPAs: a) energy charge is a complete pass through (ceiling of USD110/ton) b) reduction of 20ps/Kwh in capacity charge for supply of up to 80% availability c) sharing of mining profits from Indonesia (minimum 15ps/ Kwh)
• In case the amendment in PPA’s are approved, we estimate 55-60ps/Kwh reduction in under recovery for Tata Power, which implies Rs13bn-Rs15bn impact on EBITDA. We estimate sharing of mining profits at 15ps/Kwh (based on formulae)

View and valuation

The order increases the probability of a similar order for Tata Power, although the risk of challenge to the Adani order in higher courts remains. We believe Tata Power’s efforts to sell non-core assets and deleverage its balance sheet will help improve the company’s financials. As the stock is currently inexpensive at 1.0x FY20E P/B and 14.8x FY20E P/E, we reiterate our Outperformer rating on Tata Power with a revised target price of Rs84/share (Mundra resolution not factored in; Mundra resolution as per amended PPA further improves target price by Rs22/share).