Power Sector – A Ray of Hope

You have already that Foreign Institutions are bullish on the Indian Power sector. In this post, I am going to briefly touch upon the reforms [excluding Nuclear Power] and developments in the Global Energy that will impact the bottom-line of Indian companies. The following post will cover outlook of Individual power producing companies.

The big producers of Power are NTPC, Tata Power, CESC, Neyveli Lignite, Reliance Energy, Gujarat Industries Power and state owned electricity corporations. The Ministry of Power has issued LoI to 64 different companies to meet the additional production target of 68,539 MW. Most of these are less than 1,000 MW in capacity powered by Coal [Ya I know its dirty energy, but we can’t help it]. Tata, Reliance and NTPC are developing ultra mega power projects for which they have tied up with coal mines in Indonesia. However, even before they have started importing the Coal, the Indonesian Govt has asked the suppliers to re-negotiate the price of Coal and link it to International prices [Earlier deal was at fixed price]. This move directly affects Tata Power, Reliance Power and Lanco.

With this grandiose plan, I think more than the Power generating companies, it is the companies which are involved in manufacturing of Equipments [BHEL, ABB], Transformers [KEC International, BGR Energy] and EPC contractors [L&T, Punj Lloyd etc] who will directly benefit the most. Coverage of these companies is deferred or search through the archives on our site.

Tata Power Company Ltd:
Tata Power plans to source 8-12 m tonnes per annum (mtpa) of coal from Indonesia’s Bumi Resources for its Mundra Ultra Mega Power Project (UMPP). The fuel purchase agreement has a mechanism to escalate the coal prices in line with market prices. Any variation in coal costs can be partially passed through to the UMPP’s customers Partial pass-through of fuel costs means a downside to Mundra UMPP’s valuation.

Mundra UMPP – Construction is on in full swing and work on boiler and turbine for Unit 1 and 2 has started; 2) Maithon – Ordering of equipment is complete and civil work has started; 3) 250MW Mumbai – CoD will be achieved by October 2008; and 4) Haldia expansion is being commissioned now.

Tata Power has started accounting for efficiency incentives and benefits to be passed onto customers, on a quarterly basis rather than in the last quarter of the fiscal year. This will reduce quarterly earnings volatility. 1QFY09 effective tax rate was higher at 29% v/s 17% in 1QFY08 as company’s deferred tax liability fund was exhausted by loss on redemption of US64 bonds.

Tata Power is expected to report EPS of Rs 24.7, 28.8 and 34.9 over the next 3 years. Apart from Power, the company has stake in Tata groups Telecom business. Based on the above facts the Sum of Parts Valuation will turn out as follows,

Value of Power Generation, Transmission and Distribution Business – Rs 570
Value of Telecom Investments – Rs 220
Mundra and Maithon UMPP – Rs 270
Bumi Resources Mines – Rs 340
Value of Other Group Company Investments – Rs 100

Based on the above, analysts have set a target price of Rs 1,500 on the Tata Power stock.

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