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Risk-reward unfavourable after sharp run-up in stock price

We downgrade Tata Power to SELL and retain our PT of Rs85. Post the sharp 33%
increase in stock price in past one month without change in fundamentals, prompts
us to downgrade it to Sell. The current valuation ignores (1) litigation over
compensatory tariff (CT) and delay in its realization. Although, we factor-in CT, a
scenario of zero tariff hike drags fair price to Rs59; (2) we reiterate that equity
dilution by 14% in Apr-14 is negative as interest cost savings have a neutral impact
to 75% of our SoTP price target, it being regulated: and hence a drag on fair equity
value; (3) lack of firm visibility on projects in the pipeline and (4) volatile earnings,
consistent cost and tax adjustments primarily in coal business, makes us cautious.
Mundra UMPP update: SEBs (including Gujarat) have litigated with APTEL against
CERCs compensatory tariff order and our channel checks reveal that the first hearing
is yet to commence. TPC has hence not reported compensatory tariff revenue. TPC
has clarified that CT of Rs10.2bn for FY13/14 as stated in notes to accounts is lower
than CERCs CT order (which is pegged at Rs14.9bn) as TPC would true-up with a lag.
However, we have extended optimism and built-in compensatory tariff as per CERC
from FY15. Although a scenario of zero tariff hike is unlikely, we highlight that as per
our sensitivity analysis, such scenario would imply a fair price of Rs59.
Earnings Snapshot: EBITDA, on a like-to-like basis adjusted with diminution in value
of investments by Rs0.2bn, provisions of fixed costs related to Mumbai Licence Area
of Rs0.3bn and exceptional cost in CGPL of Rs0.6bn, stood at Rs18.2bn (+4% YoY and
+4%QoQ). PBIT for coal business at Rs4.8 bn (+92% QoQ) remains volatile. PBIT for
power business at Rs7.8 bn (-25% QoQ) was mainly due to provisions and
exceptional cost items. PAT was below our and street estimates owing to above non-
recurring items, higher tax liability in coal business and reversal of MAT tax credit.
Outlook: Outcome of CERCs decision on tariff and its implementation will be a key
variable to watch out for in addition to utilization of cash post Arutmin stake sale and
likely receipts of USD450mn (post tax) at Coal SPV in FY15. TPC should be FCF positive
from FY15E onwards, backed by subdued capex cycle, healthy cash flow from coal
business and regulated 16% returns from nearly half its generation capacity. We have
revised FY15/16E earnings to primarily factor in moderation in debt and hence
interest cost. We have also revised our INR/USD assumptions.
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. Key
downside risks are (1) low or zero tariff hike for Mundra and (2) materialization of
contingent liabilities.
Y/E Mar Consolidated (Rs mn) Q4FY14 Q4FY13 YoY (%) Q3FY14 QoQ (%) Q4FY14E Var (%)
Net sales 88,052 89,973 (2.1) 86,561 1.7 91,983 (4.3)
EBITDA 18,215 18,554 (1.8) 17,865 2.0 17,220 5.8
EBITDA margin (%) 21 21 0.3 21 0.2 19 10.5
Net Income (1,884) 1,376 NM (1,180) NM 1,292 NM
Operating Metrics:
Coal Production - KPC & Arutmin (MT) 22.1 19.6 12.8 19.2 15.1 20 10.5
Coal Sales - KPC and Arutmin (MT) 22.1 19.0 16.3 23.4 (5.6) 20 10.5
FOB realisation (USD/tonne) 55.0 72.3 (23.9) 58.0 (5.2) 61 (9.8)
Cash cost of mining (USD/tonne) 35.0 44.3 (21.0) 37.4 (6.4) 45 (22.2)
Source: Company, Centrum Research

Target Price Rs85 Key Data
CMP* Rs104 Bloomberg Code TPWR IN
Downside 18.1% Curr Shares O/S (mn) 2,704.6
Previous Target Rs85 Diluted Shares O/S(mn) 2,704.6
Previous Rating HOLD Mkt Cap (Rsbn/USDbn) 280.7/4.8
Price Performance (%)* 52 Wk H / L (Rs) 109.5/65.7
1M 6M 1Yr 5 Year H / L (Rs) 140.2/65.7
TPWR IN 32.9 35.3 19.3 Daily Vol. (3M NSE Avg.) 7646662
NIFTY 8.0 17.1 18.1
*as on 30 May 2014; Source: Bloomberg, Centrum Research
Shareholding pattern (%)*
26-Apr-14 Mar-14 Dec-13 Sep-13
Promoter 33.0 32.5 32.5 32.5
FIIs 25.8 26.0 26.0 25.1
Dom. Inst. 22.5 22.3 22.5 23.3
Public & Others 19.0 19.2 19.0 19.1
Source: BSE, *as on 30 May 2014
Coal business - PBIT earnings and cash receipts
0.0
1.0
2.0
3.0
4.0
5.0
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0%
100%
200%
300%
4
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Cash receipts from coal business (Rs bn) RHS
Change in PBIT

Source: Company, Centrum Research
Earning Revision
Particulars
(Rs bn)
FY15E FY16E
New Old Chg (%) New Old Chg (%)
Revenue 383.5 383.1 0.1 377.0 393.1 (4.1)
EBITDA 84.6 85.5 (1.0) 90.6 92.0 (1.5)
EBITDA Margin (%) 22.4 22.7 (30 bps) 24.5 23.8 70 bps
APAT 18.4 17.8 3.3 22.0 21.7 1.3
Source: Centrum Research Estimates
Centrum vs. Bloomberg Consensus*
Particulars
(Rs bn)
FY15E FY16E
Centrum BBG Chg (%) Centrum BBG Chg (%)
Revenue 383.5 382.7 0.2 377.0 398.3 (5.3)
EBITDA 84.6 82.4 2.7 90.6 85.3 6.2
PAT 18.4 16.0 14.8 22 17.9 23.1
*as on 30 May 2014; Source: Bloomberg, Centrum Research

Bloomberg Consensus
Centrum
Target
Price
(Rs)
Variance
(%)
BUY SELL HOLD
Target
Price (Rs)
30 2 9 99 85 (14.1)
Source: Bloomberg, Centrum Research Estimates

Sachin Mehta, sachin.mehta@centrum.co.in; 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 32.2 2.0
FY14 356.5 7.9 77.1 21.7 (2.6) NM
(1.1) (0.3) (0.3) NA 2.1
FY15E 383.5 7.6 84.6 22.4 18.4 NM
6.8 13.9 6.9 15.3 1.9
FY16E 377.0 (1.7) 90.6 24.5 22.0 19.7
8.1 14.1 8.3 12.8 1.7
FY17E 399.3 5.9 91.6 23.4 22.8 3.7
8.4 13.2 8.6 12.3 1.5
Source: Company, Centrum Research Estimates
Power
Sell
Rating Revision 30 May 2014
INDIA
Tata Power


2
Tata Power

Valuation and View
We have arrived at the target price at Rs 85 using SOTP valuation. Individual projects/business
divisions have been valued by either DCF or price-to-book (details are given below).
Exhibit 1: SoTP
Core Business Assets:
Value/share
(Rs)
% of Target
price
Valuation Base
Mumbai License Area* 26 31
Assigned 1.5x FY16E provisional
regulated equity base
Mundra UMPP + Indonesian coal assets 19 22 WACC 9.42%, COE at 13.3%
Other generation assets (Refer note below) 17 20 P/Bx to equity base
NDPL 5 6 1x P/B based on FY14P
Power links Transmission 2 2 2x P/B based on FY14P
Maithon Power 5 5 WACC at 10.76%, COE at 13.3%
Non-Core Business Assets:

Unquoted Investments 10 11 At 1x FY14P BV
Quoted Investments 2 2 At 1x FY14P BV
Target Price 85 100

Note: Projects considered include Jojobera; Jamshedpur; Belgaum; Haldia, Kalinganagar, Solar and Wind assets
*Although, distribution licence expires in Aug-14 and likely to be renewed, we factor-in a status quo.
Source: Company, Centrum Research Estimates
Exhibit 2: Sensitivity Analysis to FY15E
Sensitivity to key variables %change % impact on EBITDA % impact on EPS
Increase in unit sale price for Mundra UMPP 1 0.9 3.5
Source: Company, Centrum Research Estimates

Exhibit 3: 1 year forward P/B chart Exhibit 4: 1 year forward P/E chart
1.0
1.5
2.0
2.5
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P/BV Mean
Mean + Std Dev Mean - Std Dev

(50)
0
50
100
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Close Price 10x 14x 18x 22x

Source: Bloomberg, Company, Centrum Research Estimates Source: Bloomberg, Company, Centrum Research Estimates
Exhibit 5: Comparative Valuations
Company
Mkt Cap
(Rs bn)
CAGR FY14-FY16E (%) EBITDA Margin (%) PE (x) P/B (x) RoE (%) Div Yield (%)
Rev. EBITDA PAT FY14 FY15E FY16E FY14 FY15E FY16E FY14 FY15E FY16E FY14 FY15E FY16E FY14 FY15E FY16E
Tata Power 280.7 2.8 8.4 NM 21.7 22.4 24.5 NA 15.3 12.8 2.1 1.9 1.7 (0.3) 14.0 14.2 1.2 1.2 1.2
NTPC 1,323.4 5.3 0.9 (2.8) 24.8 23.4 22.8 12.1 13.7 13.2 1.5 1.5 1.5 13.2 11.0 10.9 3.6 3.6 3.6
Adani Power* 172.9 21.3 41.7 NM 25.6 34.3 35.0 (7.4) 77.0 23.7 4.0 2.9 2.7 (52.8) 1.6 8.9 0.0 0.0 0.0
JSW Energy* 121 1.3 (5.0) (1.5) 35.6 33.2 31.3 11.2 11.8 11.7 1.7 1.6 1.5 16.2 14.5 13.2 2.5 2.4 2.4
Source: *Bloomberg, Centrum Research Estimates
Rs


3
Tata Power

Quarterly financials, Operating Metrics and Key Performance Indicators
Exhibit 6: Quarterly Financials
Particulars (Rs mn) Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14
Net Sales 71,976 76,495 89,917 89,973 92,918 87,171 86,561 88,052
Other operating income 563 503 476 352 477 476 439 393
Fuel Cost 21,107 24,328 26,958 24,224 27,899 24,700 23,069 23,289
Cost of Power Purchase 16,606 17,926 21,998 21,657 19,921 20,037 16,354 17,650
Coal processing charges 5,935 6,317 7,011 6,187 6,773 6,078 7,335 6,645
Deferred stripping cost - - - - - - - -
Total operating expenses 58,410 61,904 71,846 71,771 72,727 67,340 69,135 70,230
EBITDA 14,129 15,093 18,547 18,554 20,668 20,307 17,865 18,215
Depreciation 5,060 5,420 5,873 4,164 6,508 6,891 6,655 7,242
Interest 5,481 6,229 7,403 7,242 9,025 8,029 8,750 8,586
Other Income 626 685 110 395 (2,279) (2,929) (941) 531
PBT 4,214 4,128 5,382 7,543 2,857 2,458 1,518 2,917
Tax 2,263 2,225 2,299 4,992 3,346 1,254 1,656 3,828
Exceptional items - (2,500) (6,000) - - - - -
RPAT 1,951 (597) (2,918) 2,550 (490) 1,204 (137) (911)
Minority Int. / Profit share of Asso. (492) (241) (371) (737) (657) (455) (612) (543)
Interest on perpetual debt/Others 344 823 460 437 443 465 431 431
Net Income 1,116 839 2,250 1,376 (1,590) 284 (1,180)** (1,884)**
YoY Growth (%)
Net Sales 15.2 15.1 25.4 25.5 29.1 14.0 (3.7) (2.1)
EBITDA 2.0 50.5 27.0 27.1 46.3 34.5 (3.7) (1.8)
Margins (%)
EBITDA 19.6 19.7 20.6 20.6 22.2 23.3 20.6 20.7
APAT 1.6 1.1 2.5 1.5 (1.7) 0.3 (1.4) (2.1)
Key operational parameters

Coal Production (MT) KPC and Arutmin 16.4 19.4 22.9 19.6 20.0 21.7 19.2 22.1
Coal Sales (MT) KPC and Arutmin 16.4 15.5 20.7 19.0 20.5 19.0 23.4 22.1
FOB realisation (USD/tonne) 84.0 78.4 71.6 72.3 66.0 62.0 58.0 55.0
Cash cost of mining (USD/tonne) 48.1 45.5 41.3 44.3 42.0 37.7 37.4 35.0
Segment Revenue
Power 48,240 54,885 64,033 65,002 68,937 63,929 59,628 59,829
Coal 22,650 20,568 24,640 22,191 21,841 23,235 25,676 24,149
Others 2,096 2,509 2,959 3,920 3,238 2,939 4,961 6,632
Less: Inter segment revenue (447) (964) (1,240) (788) (621) (2,457) (3,264) (2,165)
Total segment revenue 72,539 76,998 90,393 90,325 93,395 87,647 87,001 88,445
Segment Results (PBIT)
Power 5,782 7,174 9,665 13,466 13,035 8,840 10,438 7,809
Coal 2,576 2,902 3,109 1,707 962 2,151 169* 4,768
Others 28 (166) (53) (144) (146) 94 285 (71)
Segment Margin (PBIT) (%)
Power 12.0 13.1 15.1 20.7 18.9 13.8 * 17.5 13.1
Coal 11.4 14.1 12.6 7.7 4.4 9.3* 0.7 19.7
Others 1.3 (6.6) (1.8) (3.7) (4.5) 3.2* 5.7 (1.1)
Source: Company, Centrum Research; * This PBIT adjusted with non-recurring cost/claims of MDO of Rs2.3bn at Arutmin mine is at Rs2.5bn. We have considered the AEBIT.
**Differs from company reported NI as we adjusted 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 50* 50* 50*
Coal realization (USD/tonne) 76 60 75 75 80
Cash mining cost FOB (USD/tonne) 48.7 38 45 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 FY14P FY15E FY16E FY17E
Revenues 3,30,254 3,56,487 3,83,461 3,77,048 3,99,295
Material consumed & Power
purchase 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 (after
exceptional items)
7,645 (2,600) 18,359 21,974 22,788
Source: Company, Centrum Research Estimates
Exhibit 9: Key Ratios
Y/E March FY13 FY14P 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) 14.0 14.2 13.3
ROCE 0.8 (0.3) 6.9 8.3 8.7
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 (%) 1.1 1.2 1.2 1.2 1.2
Per 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 32.2 n.a 15.3 12.8 12.3
P/BV 2.0 2.1 1.9 1.7 1.5
EV/EBITDA 9.2 7.9 6.4 5.7 5.4
EV/Sales 1.8 1.7 1.4 1.4 1.3
Mcap/Sales 0.9 0.8 0.7 0.8 1.3
Source: Company, Centrum Research Estimates
Exhibit 10: Balance Sheet
Y/E March (Rsmn) FY13 FY14P FY15E FY16E FY17E
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 1,77,929
Shareholders' 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 current
Liability
10,005 11,379 11,379 11,379 11,379
Total Capital Employed 5,20,723 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. 1,52,091 1,89,093 1,92,431 1,88,916 1,99,998
Net current assets 50,855 26,725 50,647 43,362 45,898
Deferred Tax Asset/Others 1,558 1,315 1,315 1,315 1,315
Total Assets 5,20,723 5,26,618 5,14,375 4,94,083 4,92,539
Source: Company, Centrum Research Estimates
Exhibit 11: Cash Flow
Y/E March (Rsmn) FY13 FY14P FY15E FY16E FY17E
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 current
assets
(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-current
liabilities
9,076 1,852 1,357 (414) 1,304
Net chg in working capital (19,373) 15,085 (4,956) 551 (1,738)
CF from op. activities (a) 5,500 43,520 40,946 51,685 50,303
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 Equity
raised/(repaid)
32,267 10,351 (26,264) (37,930) (19,995)
Dividend (incl. tax) (4,567) 1,226 (2,980) (4,161) (3,016)
Others 729 (1,882) (451) (452) (451)
CF from fin. activities (c) 28,429 9,695 (29,696) (42,543) (23,462)
Net chg in cash (a+b+c) (17,542) (4,349) 19,870 (7,009) 1,667
Source: Company, Centrum Research Estimates


5
Tata Power

Appendix A
Disclaimer
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6
Tata Power

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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%

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