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Compensatory tariff may get delayed; cautiously optimistic


We 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 it
to Hold. Our valuation factors-in (1) Recovery of compensatory tariff (CT) as per
CERC order, but we highlight that a scenario of zero tariff hike drags fair price to
Rs59; (2) stake sale in Arutmin mine by Q4FY15. Although its promoter BUMI faces
severe financial crisis, we extend optimism based on Management commentary; (3)
balance sheet deleveraging and (4) jump in overall earnings, although consistent
cost 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 CT
from Mar-14 vs CERCs order which directed payment of CT from Apr-12. But, our
channel checks reveal that SEBs have resisted payment of CT and await final APTEL
order (expected on 19 Aug 14), post which either a resolution or protracted litigation
may ensue. TPC has clarified that it would decide on accounting of CT once clarity
emerges on recovery of CT. We are cautiously optimistic and have extended
optimism and built-in CT as per CERCs order. Although a scenario of zero tariff hike is
unlikely, we highlight that as per our sensitivity analysis, such a scenario would imply
a fair target price of Rs59. Alternatively, if SEBs agree for Rs0.3 tariff hike, it being
matched with the L2 bid, our PT would drag toRs68.
Earnings snapshot: EBITDA, on a like-to-like basis adjusted with diminution in value
of 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) dragged
earnings with decline in coal realizations and consequent dip in margins. Dip in coal
realization is due to change in strategy to mine low calorific coal. PBIT for power
business 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 of
Rs1bn which however off-sets higher deferred taxes of Rs1.1bn.
Outlook: Outcome of CERCs decision on tariff and its implementation will be a key
variable to watch out for in addition to receipt of cash on Arutmin stake sale and
consequent balance-sheet deleveraging in FY15. We extend optimism and estimate
TPC to be FCF positive from FY15E onwards, backed by subdued capex cycle, recovery
of 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. Key
downside risks are (1) low or zero tariff hike for Mundra and (2) materialization of
contingent 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
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Cash receipts from coal business (Rs bn) 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
Centrum
Target
Price
(Rs)
Variance
(%)
BUY SELL HOLD
Target
Price (Rs)
22 7 10 107 85 (20.3)
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 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


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 FY16E
Power links Transmission 2 2 2x P/B based on FY16E
Maithon Power 5 5 WACC at 10.76%, COE at 13.3%
Non-Core Business Assets:

Unquoted Investments 10 11 At 1x FY16E BV
Quoted Investments 2 2 At 1x FY16E BV
Target Price 85 100

Note: Projects considered include Jojobera; Jamshedpur; Belgaum; Haldia, Kalinganagar, Dagacchu, Georgia, Solar and Wind assets
*Although, distribution licence expires in Aug-14 and likely to be renewed, we hence 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
3.0
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P/BV Mean
Mean + Std Dev Mean - Std Dev

(50)
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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 247.1 2.8 8.4 NM 21.7 22.4 24.5 NA 13.5 11.2 1.9 1.7 1.5 (0.3) 13.9 14.1 1.4 1.4 1.4
NTPC 1,150.2 5.3 0.9 (2.8) 24.8 23.4 22.8 10.5 12.0 11.5 1.3 1.3 1.3 13.2 11.0 10.9 4.1 4.1 4.1
Adani Power* 155.4 13.3 18.8 NM 31.7 34.0 34.8 (52.0) 273.2 21.7 2.4 2.4 2.2 (5.4) 0.8 7.7 - - -
JSW Energy* 126.4 4.1 (2.1) 24.6 37.5 35.0 33.2 16.8 10.9 10.8 1.9 1.7 1.5 11.8 16.5 14.8 2.4 2.5 2.6
Source: *Bloomberg, Centrum Research Estimates


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 25,858
Cost 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 for 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 & 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 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 1.4
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 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
Source: Company, Centrum Research Estimates
Exhibit 10: Balance Sheet
Y/E March (Rsmn) FY13 FY14 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 5,20,724 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
Source: Company, Centrum Research Estimates
Exhibit 11: Cash Flow
Y/E March (Rsmn) FY13 FY14 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
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 Equity
raised/(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
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%

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
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