New capacities power growth prospects

Tata Power, in the past six years, has added a mere 944 Mw of generation capacity. However, this is to surge to an extra 5,389 Mw over the next two years, expanding the existing base by half.

Of the new capacities, 2,863 Mw, including part of the Mundra Ultra Mega Power Plant (UMPP) capacity, is expected to become operational in the current financial year itself.

Last month-end, it also raised $450 million (Rs 2,025 crore) of long-term debt. To be jused, it said, for corporate activities and acquisitions, among others. In the light of these developments and estimated growth in revenues and profits, analysts believe the stock is reasonably priced at the current Rs 1,229.

They have valued it at Rs 1,400-1,460 per share, based on sum of the part (SOTP) valuations, taking into account the value of its stake in coal mines, holdings in telecom business and others.

Timely expansion

Tata Power has a relatively stable business model, with about 94 per cent of the operational capacity having long-term (over five years) power purchase agreements (PPAs).

For ongoing projects, too, PPAs and fuel supplies are in place. An integrated business model, high fuel security and access to funding provide comfort in sustainability, given the uncertainties for the sector.

In a country where power deficits are high and demand rising, the company's capacity expansions are seen to be timely and will drive its financials significantly.

As compared to its present capacity of 3,127 Mw, the commissioning of new capacity will expand its operational base to 6,014 Mw in 2011-12 and to 8,516 Mw by 2012-13.

Its 1,050 Mw Maithon power generation project will become operational next month. This is in addition to 1,600 Mw to be added from the commissioning of the Mundra UMPP, which includes 800 Mw in the September quarter and another 800 Mw by March.

Most importantly, the commissioning of these projects is on schedule, as Maithon was completed to the extent of 95 per cent and Mundra by 77 per cent as on March.

While the capacity addition is significant, its impact on the financials will be felt partially in the current year and more so in 2012-13.

Analysts estimate almost 20 per cent revenue contribution in 2012-13 would come from these new capacities, compared to 6.5 per cent in 2011-12.

In the renewable energy (wind and solar) space, too, the company is investing Rs 1,300 crore in the current financial year, to add 185 Mw of generation capacity.

From the longer term perspective, the plans are equally big, for a generation capacity of 25,000 Mw by 2016-17.

Coal, rising gains

The company's coal business contributed 32 per cent to consolidated revenue and 43 per cent to profits before interest and tax in the nine months ended December 2010.

The company had acquired 30 per cent equity in the Indonesia-based Bumi Resources in 2007. Bumi is expected to increase its coal sales from 60 million tonnes in 2010-11 to 80 mt in 2012-13.

On the back of higher sales volumes and realisations (expected to be in the range of $90-95 per tonne as against earlier estimates of $77 per tonne), the company is expected to benefit, and add to the consolidated revenue and profitability of Tata Power.

Additionally, according to analysts, the issues pertaining to distribution of the dividend by Bumi has been resolved, which will mean that Tata Power will receive higher payments from the former.

"Tata Power received $252 million from Bumi in FY09. This amount fell to $69 mn in FY10 and $36 mn in the first half of FY11. Now that Bumi's tax issues are over, dividend and other cash payment from Bumi have reverted to the normal run rate, with $56 million coming in Q3FY11 (December 2010 quarter)," says a recent report by Venkatesh Balasubramaniam, who tracks the company at Citi Investment Research.

Meanwhile, its other businesses like power distribution and transmission, while helping forward integration, should continue to grow and provide steady flow of revenues and profits.