April 8, 2009
Initiating Coverage CMP : INR ---- Target : INR ----- Rating : ------
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Shruti Udeshi Analyst Tel. : 4000 2641 [email protected]
FINQUEST research also available on BLOOMBERG FSPL
April 6, 2009 For Private Circulation Only 2 Investment Summary Traction in power business… 390 MW added in FY09 The Company has charted out aggressive growth plans for the addition of 10,000 MW of generation capacity in the next five years. During FY09, TPC added about 390 MW of generation capacity comprising 120 MW at Haldia, 250 MW at Trombay and 52 MW of wind capacity. Haldia will be able to export over 600 million units of power per annum on merchant basis after meeting its commitments to the West Bengal State Electricity Board. In addition to this, 100 MW of 250 MW Unit 8 in Trombay will be sold through Tata Power Trading on merchant-basis as per the PPA signed between the two. In FY10E, TPC will sell over 1200 million units on merchant-basis from these plants at higher rates in view of the power demand-supply mismatch. With the commissioning of above capacities, we expect the revenue of the standalone power business to witness a CAGR growth of … %
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Financial Closure of Mundra and Maithon achieved… execution on schedule Tata Power has completed financing for two of its largest power plants under construction, 4,000 MW Mundra UMPP in Gujarat and 1,050 MW Maithon Right Bank Thermal Power Project in JV with Damodar Valley Corporation. For Mundra, the company has tied up to raise USD 1.8 billion in foreign exchange loans and INR 58 billion rupee loan with several multilateral and domestic financial institutions. The financing terms of the loan seems attractive with rupee debt tied up at 200bps below SBI PLR, for a 15 year bullet repayment loan. The work of both the projects is on schedule. 13% and 21% work completed at Mundra and Maithon respectively. TPC is expected to commission first unit of Maithon Power Project (525 MW) and Mundra UMPP (800MW) in March 2010 and September 2011 respectively. We expect Mundra Project to earn a RoE in the range of 16-17%. Though the management has not disclosed the price at which the coal offtake agreement has been signed with KPC, the management indicated that the prices of imported coal from the Indonesian mines hovered at ~ USD 45/MT at the time of the agreement. However, for our valuation we have assumed a higher price of USD 70/MT to cover the transportation cost and index-linked price variation. We arrive at a Fair value of INR… for the Mundra project based on DCF methodology. We value the Maithon Power project at INR…. 1x its Book Value. We would look at valuing the project based on DCF methodology once there is some clarity on the key operational parameters and the rates at which the company has signed the PPAs.
April 6, 2009 For Private Circulation Only 3 Project Details - Mundra & Maithon Project Stake Estimated Cost D:E Financial Closure (%) (INR billion) Maithon 74% 44.5 70:30 Done with INR 31.2 bn funding from SBI Mundra 100% 170 75:25 Done with INR 42bn equity, USD 1.8bn forex loan and USD 1.4bn Rupee loan Coal Mine Operations… sufficient cash flow to cover operating costs Tata Power acquired 30% equity in Indonesian Coal Mines, PT Kaltim Prima Coal (KPC) and PT Arutmin Indonesia, from PT Bumi Resources at a value of USD 1.1 billion. Tata Power has received USD 222 million in the current year to date from as cash surplus from its investments in mines, compared to USD 45 million for half year CY07. The company has utilised the same for repayment of debt at the SPV level and will continue to do so going forward. As on Dec 2008, the outstanding debt at the SPV level stands at USD 850 million which is expected to further come down to USD 755 million by March 2009. The management believes that with the fall in crude prices, the mining costs have come down and the current coal prices are still healthy to cover the operating costs of the mines, while throwing some surplus for the company. We believe the company will gradually increase its production to 95MT per year by CY14 from 55MT per year in CY07. With long-term coal price assumption at USD 50/MT, we arrive at a Fair Value of INR… for TPC's investments in the mines.
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Stake in Indonesian coal mines … enhancing Fuel Security Tata Power would require 21 mt of imported coal for fuelling its 7,000-MW capacity addition plan over the next five years. The 4,000-MW Mundra project would require about 11-12 mtpa, while the rest would be required for its other projects, including its project in Trombay (2-3 mtpa) and a coastal project coming up in Maharashtra (6-7 mtpa). Tata Power has signed an offtake agreement with KPC, which entitles it to purchase about 10.1 million tonnes (± 20%, at TPC's option) of coal beginning 2009 up to 2021 and extendable thereafter. The company intends to divert this coal to fulfill 100% fuel requirement of Mundra. For the first five year period, 25% of the offtake quantity will be supplied at a fixed price (undisclosed) while the rest of the quantity will be supplied at index-linked prices i.e. market price. Further, it has a 10-year sourcing agreement with Adaro Mines to meet its fuel supply at Trombay Unit 8. This would cover the ~65% of the company's requirement of imported coal till 2014. The company is further looking at opportunities for securing additional supplies to fulfill its requirement for Coastal Maharshtra (Debrand) Project by way of purchasing equity in mines and entering into offtake contracts.
April 6, 2009 For Private Circulation Only 4 Sufficient cash and investments to fund equity gap The total fund requirement for the projects under construction is about INR 231 billion upto March 2012, of which about around INR 180 billion would be funded through debt and INR 51 billion through equity. Out of the debt requirement, the company has tied up for INR 157 billion already. Tata Power expects INR 28 billion of the total equity contribution to be funded from internal accruals. We believe that the strong cash flow from the standalone business should aid Tata Power in funding its requirements. However, it will not suffice the total equity funding required for its proposed capacity addition. For the balance, the company is exploring options of disinvestment of its various holdings/ assets or equity dilution through warrants, preferential issue and/or rights if required. Tata Power recently sold some part of its 11% stake in Tata Teleservices to NTT DoCoMo at INR 3.16 billion to fund its expansion requirement. In addition, we expect the company to use proceeds of INR 1 billion from the FCCB conversions to fund its power projects. The total value of investments after applying 40% discount is ~INR 43 billion which if monetized would help TPC to fund its equity obligation. Expanding portfolio in renewable energy The forum of electricity regulators headed by the chairman Central Electricity Regulatory Commission (CERC) has adopted a framework by way of which states will have to enter into a renewable purchase obligation (RPO). Under this agreement states will be required to purchase a fixed per cent of their needs from renewable energy plants. The per cent committed under the RPO will also increase progressively every year and states will have to increase the portion of their power purchase from renewable energy generating units, as per the agreement. This regulation will benefit TPC as the company is targeting a renewables portfolio of 25% of the total power generation capacity in the next 10 years. Tata Power's current wind energy portfolio is at 124 MW, which it plans to scale up to ~200 MW by the start of next fiscal. Besides, Tata Power has acquired an 11.4% stake in Geodynamics Ltd, an Australian company specializing in geothermal energy, for INR 1.65 Billion. Tata Power has already signed MoU with Govt. of Gujarat for 5 MW geothermal plant and is also looking at exploring three geothermal belts in the south, north and central parts of India. Apart from this, Tata Power along with Brisbane- based engineering company Sedgman Ltd has acquired a 5% stake in an Australian firm, Exergen Pty Ltd which has developed a process of removing moisture and contaminants from brown coal, enabling a reduction in harmful emissions when the fuel is burnt. The size and conditions of the investment are being kept confidential, but the money will help fund a USD 20 million engineering study to be conducted over the next eight to nine months. These partnerships will not only strengthen Tata Power's renewable portfolio but also create opportunities to expand its presence in the growing renewable energy market in India. Power Links and NDPL… successful Joint Ventures Tata Power, together with PGCIL, has set up the 1,200 km Tala transmission line, for extracting power from 1020 MW Tala hydro-electric project in Bhutan and supplying it to the northern parts of India. The company's profit increased by 42.9% for 9MFY09 at INR 317 million. As per the new tariff norms, the shift towards higher RoE will have a positive impact on Powerlinks. In July 2008, Tata Power acquired a 26% stake in a hydro-power project in Bhutan, while its trading arm has negotiated to purchase all power generated from the project and selling it in India. The power is expected to be evacuated through the Tala Transmission Link into India's Eastern Region Grid. This has resulted into committed transmission of power units through the line. We have valued Tata Power's stake in PowerLinks at INR … per share, based on price to book value of 1.4x, based on regulated 16% ROE.
April 6, 2009 For Private Circulation Only 5 NDPL has reduced T&D losses since it took control of the distribution company, increasing the incentive income of the company. The company reduced its ATC losses from a high of 53% to less than 20% during 2007-08. In 9M FY09, NDPL has reported a profit of INR 1170.9 million (against INR 1095.0 million in 9MFY08), an increase of 7%. Through its efficient operations and investment in technology, we expect NDPL to further cut its AT&C losses going forward. We expect it to remain below 17% for FY10E against the stipulated target of 18.5%.
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We have valued Tata Power's stake in NDPL at INR …per share, based on price to book value of 1.4x, since it is a regulated business generating fixed returns on equity. Tata BP Solar… energizing future Tata BP Solar plans to increase its solar cell manufacturing capacity from the current 52 MW to 180 MW by end-2009, an increase of about 250%. The company targets to achieve 300 MW capacity by 2012. The company has already invested over INR 3.5 billion in this fiscal for manufacturing an additional 128 MW of solar cells and 80 MW of solar modules. We expect Tata BP Solar to be a major beneficiary as PV demand expands around the world in the coming years. We estimate sales to register a CAGR of …% over FY08-11E, driven by the capacity expansion and increasing thrust on renewable energy. We value Tata Power's share in Tata BP Solar at about INR… per share, based on …x FY10E EV/EBITDA, at a discount to the average of global peers at ….x FY10E EV/EBITDA. Diversified Business Model The management has strategically planned its business diversification under business models - Regulated, UMPPs, CPPs and some merchant power as well. Further, India has been a Power-deficit country and the intensity of the situation has varied from region to region. The western region witnesses the highest power deficit at ….%. Thus TPC is well placed to take advantage of this demand supply gap with its major capacities coming on stream in this region.
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April 6, 2009 For Private Circulation Only 6 Generation Portfolio - Business Model Mix Projects Business Model Returns MLA, Jojobera, Belgaum, Wind, Maithon Regulated Normative RoE Jamshedpur, Jojobera (Unit 5) CPP PPA driven Haldia, Trombay (Unit 8) Merchant Market driven Mundra UMPP Bid Driven
Key Concerns Falling Coal Prices In the view of current credit market turmoil and falling coal prices, we believe that the coal production could witness a lesser growth than expected, resulting in low visibility on earnings. Tata Power intends to utilize the proceeds from its investments in coal assets to pay off its debt raised to acquire stake in these assets. In a scenario whereby the coal contract prices could see a drop, there may be a decline in Tata Power's share of cash surplus from the Indonesian mines. If the cash flow is not adequate enough to pay its debt as per schedule, the company will have to find other avenues in order fund the same. Indonesian benchmark coal price chart
IEL…yet to achieve financial closure Tata Power is yet to achieve financial closure for its Power Plants under IEL. There has been a delay due to some land problems faced by the JV company, Tata Steel. The 120 MW power plant being constructed at Tata Steel works, Jamshedpur for use by Tata Steel was expected to be commissioned by end of March 2009. Though the management is confident of funding the project soon, any further delay in the process could pose a downside risk to our valuations.
Valuation Thesis Outlook We remain positive on this stock with a long-term view. With capacity additions lined up in next two years, financial closure of key projects achieved, growing opportunities in the renewable portfolio and stable growth in the standalone business grant a high revenue visibility to the company post- FY09. Tata Power is well placed to gain from the expected regulatory developments, once MERC follows the recent changes made by CERC. Tata Power is facing some delay in receiving clearances for its Coastal Maharashtra Project, but expects the clouds to clear once the general elections are over. According to the management, their operation at the Indonesian mines is doing well and the current coal prices are still healthy to cover the operating costs of the mines, while throwing some surplus for the company. With regards to funding, the company is exploring various options and believes that it will comfortably fund the gap with cash and investments lying on its books. Valuation and Recommendation We recommend a 'BUY' on TATA POWER with a 12 months price target of INR , representing potential upside of ~% from current levels. We derive our target price using Sum Of The Parts (SOTP) valuation methodology to valuing its Mumbai business at INR …, Delhi distribution business at INR …, Tala Transmission at INR …, Mundra UMPP at INR …, Maithon Power project at INR …, 30% stake in Indonesia's coal mines at INR …, IEL at INR…., Tata BP Solar at INR…., Telecom investments at INR and others at INR . At CMP of, TPC trades at EV/EBITDA multiples of x and x based on our FY10E and FY11E financials respectively. The stock is trading at P/E of x and x based on FY10E and FY11E EPS respectively. Valuation Risk Downside risk remains from lower than expected progress of capacity addition, low Utilisation rates (PLF), lower than expected dividend flow from BUMI, inability to fund equity gap. Upside risk comes from higher than expected cash received from Indonesian investments and faster than expected progress in the capacity addition, higher than expected returns from the merchant capacities.
April 6, 2009 For Private Circulation Only 7 Peer Comparison
Investment Rationale Traction in power business… 390 MW added in FY09 TPC has charted out aggressive growth plans for the addition of about 10,000 MW of generation capacity in the next five years. TPC's current capacity stands at about 2,400 MW. Of the additional capacity, around 390 MW is slated to come on stream in FY09. This includes the 250 MW Unit 8 at Trombay which is expected to get commissioned in March 2009 and 90 MW plant at Haldia of (2 units of 45 MW each) and 52 MW of wind power capacity. The third unit at Haldia (30 MW) is expected to commission in April 2009. 200MW capacity to be sold on merchant basis in FY10 Tata Power received permission in December '08 to export power generated at Haldia from West Bengal. On fully commissioning, Haldia will be able to export over 600 million units of power per annum after meeting its commitments to the West Bengal State Electricity Board. 100 MW of 250 MW Unit 8 in Trombay, will be sold through Tata Power Trading on merchant-basis as per the PPA with them and when commissioned, Unit 8 will be able to sell over 600 million units per annum on a merchant-basis. In FY10E, TPC will sell over 1200 million units on merchant-basis. With the commissioning of above capacities, we expect the revenue of the standalone power business to witness a CAGR growth of….
Current Standalone Power Business - TPC's Mumbai power business has a unique mix of Thermal and Hydro Power, generated at the Thermal Power Station, Trombay, and Hydro Electric Power Stations at Bhira, Bhivpuri and Khopoli. TPC is the bulk supply licensee for the city of Mumbai, with a generation capacity of about 1777 MW, which will be enhanced by 250 MW once Trombay Unit 8 comes on stream in March 2009. As per the MERC guidelines, TPC's generation and transmission business in Mumbai earns 14% RoE while distribution earns 16% RoE. The standalone business also includes non-Mumbai generation, that is generation from plants at Jojobera (428 MW) and Belgaum (81 MW). The Belgaum power plant has a PPA in place with the Karnataka SEB (State Electricity Board) until 2013. TPC supplies power directly to bulk consumers such as the major commercial and residential complexes in the suburbs, Central and Western Railways, Mumbai Port, refineries, textile mills, fertilizer factories, Municipal Corporation water pumping plants and other major continuous processes industries. Tata Power - Existing Operations
Mumbai Licence Area Outside Mumbai
Trombay* Hydro Jojobera Belgaum Wind Haldia 1580 MW 447 MW 428 MW 81 MW 124 MW 90 MW Unit 4 Khopoli 150 72 MW Unit 5 Bhivpuri 500 75 MW Unit 6 Bhira 500 300 MW Unit 7 180 Unit 8 250
Performance over years - Trombay units have shown a sizeable growth in generation year on year with continued focus on maximizing operational efficiencies. In FY08, it achieved a PLF of 85.6% - well in excess of 79% achieved in FY07. In terms of units generated from hydro plants, there has been a fall in FY08 mainly due to the fact that the hydro units have been operating at lower PLFs during the year (37.9% in FY09 compared to 59.7% in FY08). Lower PLF was on account of order by the Krishna Water Accord, which restricts the amount of water TPC can discharge. The performance of Jojobera and Belgaum unit has also been satisfactory. April 6, 2009 For Private Circulation Only 8 Source :
April 6, 2009 For Private Circulation Only 9 CAPEX Plans TPC plans to spend about INR 5.9 billion as part of its capex for its transmission business in next two years. This is mainly for strengthening the existing transmission capacity. In case of distribution, Tata Power has received a favorable judgment from the Supreme Court to enter the retail market. The company is planning INR 10 billion capex over two years. Valuation With the additional Trombay and Haldia capacity commissioning and entrance into the distribution to retail markets, one can expect the volume of units generated, transmitted and distributed to increase which shall further boost the revenue growth of the company. Also, with the incremental demand being met from the additional Trombay and Wind Power capacity, it should benefit the company in terms of lower average fuel cost as the company currently has to purchase power from outside to fulfill its demand at a higher cost. With the commissioning of additional capacities, we expect the company to post an EPS of INR 47 in FY10E and INR 52 in FY11E. We value the core generation business (which includes Trombay, Hydel, Wind, Jojobera, Belgaum and Haldia) using discounted cash flow with a WACC 13.6% and a terminal growth rate of 2%. We arrive at a fair value of INR…. Per share. Execution of projects well on track… Tata Power has completed financing for two of its largest power plants under construction, 4,000 MW Mundra UMPP in Gujarat and 1,050 MW Maithon Right Bank Thermal Power Project in JV with Damodar Valley Corporation. The work of both the projects is on schedule. With these two big projects, most of the group's funding for plants under construction has been tied up.
Mundra Project Details The project cost of Mundra is INR 170 billion, to be funded in Debt:Equity ratio of 75:25. Tata Power was the lowest bidder for the Mundra UMPP with a 25-year levelized tariff of Rs2.26/KWh. Land acquisition activities for the Mundra UMPP has been completed; site work is in progress and orders for all major long-lead time equipment such as boilers and turbines have been placed. 17% of the work has been completed till date. The super critical technology will help achieve high efficiency - thus saving fuel and reducing greenhouse gas emissions vis-à-vis conventional technology prevailing in the country. BHEL will supply transformers and bus-ducts to the project. The INR 2.4 billion order, also BHEL's single largest for transformers, will be fulfilled between February 2010 and June 2011. The order includes 40 transformers with a cumulative capacity of 5,872 mva and five sets of India's yet highest rating of 930 mva. Mundra has already placed orders for the boiler package on Toshiba Corporation of Japan, while the steam turbine-generator sets will be supplied by Doosan Heavy Industries of Korea. Mundra - 2500 people on site, 13% work completed Boiler and TG Building Cooling water Conduits Before TG Rafts
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April 6, 2009 For Private Circulation Only 10 Power Offtake Agreements The project consists of 5 units, each of 800 MW which will generate saleable power of 3900 MW to be supplied to five states namely Gujarat (1805 MW), Maharashtra (760 MW), Rajasthan (380 MW), Haryana (380 MW) and Punjab (475 MW). The 1st of 5 units is expected to be completed in Sept 2011. (against 2014 as per the bid conditions). It is pertinent to note here that, the company is confident of completing the project ahead of schedule as it has advanced all the PPA's by 6 months. Funding Tata Power has completed financing for the 4000 MW Mundra UMPP, its largest power plants under construction. The total debt requirement of the project is roughly around INR 125 billion. The financing comprises equity worth INR 42.5 billion, external commercial borrowings (ECB) of up to USD 1.8 billion and rupee loans of up to INR 55.5 billion. Of the equity funding, TPC has committed INR 8 billion till date. State Bank of India, which has lent INR 20 billion for the project, is the lead bank for the rupee loan. The rupee loan has been lent at SBI PLR - 200bps for a period of 15 years. The International Finance Corporation (IFC) has lent USD 450 million to the project for 20 years making this its longest tenure loan. This includes a grace period of six years. Repayments will start only after six years. The Asian Development Bank has also committed USD 450 million to the project, which will be provided in two tranches, with a first tranche of USD 250 million. The balance will be syndicated by ADB to the Export-Import Bank of Korea through a risk participation agreement. International loans have been lent at Libor + 200bps.
Mundra Funding
EQUITY DEBT 42.5 billion
Rupee Loan (INR billion) 55.5 Rupee Loan (INR billion) 55.5 State Bank of India (SBI) 20 Export-Import bank of Korea NA IIFC 18 International Finance Corporation 0.45 Housing and Urban Development Corporation 5 Korea Export Insurance Corporation NA Oriental Bank of Commerce 5 BNP Paribas NA Vijaya Bank 5 Asian Development Bank 0.45 Associate Banks of SBI 2.5
April 6, 2009 For Private Circulation Only 11 Fuel Supply The company has signed an offtake agreement with KPC and Arutmin, Indonesian Coal Mines which entitles it to purchase about 10.1 million tonnes (± 20%, at TPC's option) of coal beginning 2009 up to 2021 and is extendable thereafter. We estimate total coal demand for the Mundra UMPP project to be about 11-12 MT per annum which can be met from the agreement signed with these mines. In the Mundra project, 55 per cent of the tariff is based on fixed pricing, and balance linked to the CERC index (meaning, increase in fuel and operational costs can be passed on to consumers). Logistics Arrangement Tata Power has formed an SPV, TPC Energy Asia Pvt Ltd, Singapore to venture into shipping business, to hedge freight costs. Based on the current operating capacity and expansion projects, Tata Power will have an imported coal requirement of ~22 million tons of imported coal. Thus, the company will require ~8-9 capsize vessels, of which it has booked 3 vessels on long terms charter basis, and has placed orders for 2 vessels on the Korean yard, to be delivered in 2011 at a cost of USD 100 million each. Mundra Port &SEZ is setting up a coal-handling jetty with a capacity of 30 million tonnes per annum to take care of the coal imports of about 22 million tonnes required by the Mundra ultra mega power plant (UMPP) of Tata Power and the 2,640-MW Mundra power project of Adani Power. This capacity is expected to be completed by Jan 2011. Valuation We expect Mundra to earn a ROE of 17%. We arrive at a fair value of INR … for Mundra UMPP, using DCF based valuation methodology. Key Assumptions - We assume that the company will import coal of 5,700 GCV from these mines for the project. We believe the heat rate for the plant will be about 2129 kcal/kg. The company entered into an agreement with Bumi Resources in when coal prices were about USD 45/MT. We have assumed coal prices at USD 70 /MT, to accommodate any risk arising from increase in coal prices. We assume the plant life to be 25 years and have taken zero terminal growth thereafter. Further, we have assumed an annual maintenance CAPEX of INR 1 billion till the life of the project. Cost of Debt taken at 10.5%, Cost Of Equity 14%.
April 6, 2009 For Private Circulation Only 12 Sensitivity Analysis Terminal Growth 96 0% 1% 2% 3% 4% 8.5% 172 174 175 178 181 9.0% 132 133 134 136 138 9.5% 96 96 97 98 99 10.0% 62 62 63 63 64 WACC 10.5% 30 30 31 31 32 With every USD 10/MT increase/decrease in coal price, our fair price value for Mundra increases/ decreases by INR 12 per share.
MAITHON Project Details Maithon Power Ltd (MPL), a 1050 MW greenfield project, is a joint venture of Tata Power and Damodar Valley Corporation in the ratio of 74:26. The project is a Mega Power Project under the Mega Power Policy of the Government of India. The project cost of Maithon is INR 44.5 billion, to be funded in Debt:Equity ratio of 70:30.
Project Status The total land required for the project is 1120 acres and of which DVC has already acquired a significant portion of the required land. MPL has obtained all major clearances and permits for the project. The orders for main equipment have been placed with BHEL. The order worth INR 21.1 billion includes supply and commissioning of steam generators, turbine generators, electrostatic precipitators and associated auxiliaries, besides controls and instrumentation. Site works are in progress and 21% of the project work has been completed. Unit I and II of the project is expected to be completed in Oct 2010 and March 2011 respectively. Maithon Power Project - 21% of the Project Work has been completed
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Power Offtake Agreements Maithon Power Ltd has obtained open access from Power Grid Corporation of India to transmit power through their infrastructure to the power deficit northern states. The management has not disclosed the tariff rates at which the PPA's have been signed. Power Purchase Agreements Customers MW DVC 300 NDPL 300 WBSEB 150 PSEB 300
April 6, 2009 For Private Circulation Only 13 Funding The debt for the project is INR 31.2 billion, and is being funded by a consortium led by State Bank of India (SBI). The State Bank of India group is taking the largest exposure to the tune of INR 10 billion. The consortium of banks include Allahabad Bank, Bank of Baroda, Canara Bank, Central Bank, Dena Bank, Indian Overseas Bank, J&K Bank, Oriental Bank of Commerce, Punjab & Sind Bank, Tamilnadu Mercantile Bank and UCO Bank. Fuel The coal requirement for the project will be 4.894 mtpa. The long-term coal linkage has been allotted from the mines of Bharat Coking Coal (BCCL) and water allocation is from the adjacent Maithon reservoir. Valuation We have valued the Maithon project at 1x its Book Value. We would look at valuing the project based on DCF methodology once we there is some clarity on the key operational parameters and the tariff rate at which the company has signed the PPAs. IEL (Jamshedpur and Jojobera) - Industrial Energy Limited (IEL) a joint venture company promoted by Tata Power (74%) and Tata Steel Limited (Tata Steel) (26%) is implementing the following projects. The power from these projects will be used for captive consumption of Tata Steel. Power House 6 for Tata Steel Works, Jamshedpur A 120 MW power plant is being constructed at Tata Steel works, Jamshedpur for use by Tata Steel. The plant will utilize waste blast furnace and coke oven gases of Tata Steel to generate power. The project is expected to be commissioned by end of March 2009. Unit 5 at Jojobera A 120 MW power plant is planned at the Company's existing site at Jojobera. IEL has placed orders for major equipment. The project is expected to be commissioned in the third quarter of FY10. Tata Power is yet to achieve financial closure for its Power Plants under IEL. There has been a delay due to some land problems faced by the JV company, Tata Steel. However, being a Promoter Group company, the management believes that it should not face any problem and expects to tie up debt of INR 5 billion soon. Valuation We have valued the IEL projects at 1x its Book Value. We would look at valuing the project based on DCF methodology once it achieves financial closure of the project. The management expects to earn a RoE of 16-18% on these plants based on Captive Power Plants (CPP) business model.
April 6, 2009 For Private Circulation Only 14 Indonesian Mines Rationale Tata Power acquired 30% equity in Indonesian Coal Mines, PT Kaltim Prima Coal (KPC) and PT Arutmin Indonesia, from PT Bumi Resources at a value of USD 1.1 billion. The acquisition was made through two special purpose vehicles (SPVs), one formed in Mauritius, Tata Power (Mauritius) Ltd and the other, Tata Power (Cyprus) Ltd, in Cyprus. Given the requirement of coal, considering the expansions on anvil, TPC took this step of backward integration in an effort to secure its energy requirements. Also, the investment in the coal companies provides a natural hedge to the power business against an event of rising coal prices.
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Agreement Tata Power has signed an offtake agreement with KPC, which entitles it to purchase about 10.1 million tonnes (± 20%, at TPC's option) of coal beginning 2009 up to 2021 and is extendable thereafter. For the first five year period, 25% of the offtake quantity will be supplied at a fixed price (undisclosed) while the rest of the quantity will be supplied at index-linked prices i.e. market price. The entire offtake from the sixth year onward will be at market driven prices. Along with existing contracts, this would cover the bulk of the company's requirement of imported coal till 2014. PT Kaltim Prima Coal and PT Arutmin Indonesia together produced 54.2 million tonnes of coal in 2007, as against 50.7 million tones in 2006. The quality of coal from these mines is superior to that of most Indian coal, with calorific values ranging from 5,700 kcal to 6,800 kcal. Funding The acquisition was funded by a one-year bridge loan of USD 950 million fully guaranteed by the company. TPC recently refinanced this bridge loan. The refinancing consists of two long-term facilities, a non-recourse facility for USD 590 million with a tenor of six years and a facility of USD 270 million with recourse to the company from Tata Power Mauritius for a tenor of 7 years. The financing has been provided by a group of banks led by five mandated lead arrangers including Barclays Capital, Bank of India, ICICI Bank State Bank of India and Sumitomo Mitsui Banking Corporation at LIBOR plus 200 bps. The balance bridge facility amounting to USD 90 million has been repaid through a short-term loan of USD 40 million, usage of surplus funds of USD 20 million and the company remitting USD 30 million from India.
April 6, 2009 For Private Circulation Only 15 Tata Power has received USD 222 million in the current year to date as cash surplus from its investments in mines, compared to USD 45 million for half year CY07. The company has utilised the same for repayment of debt at the SPV level and will continue to do so going forward. As on Dec 2008, the outstanding debt at the SPV level stands at USD 850 million which is expected to further come down to USD 755 million by March 2009. Valuation and View In last few months, the coal prices have corrected sharply by more than 50%. The performance of the mines could be impacted as economic turmoil dents the demand for power. However though the acquisition cost of the mines will look expensive, with the fall in coal prices, TPC will also benefit back in its Mundra project given the availability of low-cost fuel. Besides, the management believes that with the fall in crude prices, the mining costs have come down and the current coal prices are still healthy to cover the operating costs of the mines, while throwing some surplus for the company. We arrive at our fair value of INR… based on DCF methodology with following assumptions - Assumptions PT Bumi Resources, targeted to sell 62MT of coal in CY08, after which the management had revised its guidance to 57MT. Given the current economic scenario, we believe it will be able to sell only about 56MT. BUMI has set a 2010 production target of 100 MT. However, we believe the company will gradually increase its production to 95MT per annum by 2014.
We have taken a fixed pricing assumption for coal from CY09 onwards till the terminal year. We assume Bumi average selling price to fall to USD 50/ton, compared to its average selling price of USD70/ton in CY08. We have taken Cost of Equity at 22.5% taking into consideration higher geographical risk and the nature of mining business Cost of Debt taken at 8% given the loans taken at LIBOR plus 200 bps Sensitivity Analysis Terminal Growth 96 0% 1% 2% 3% 4% 8.5% 172 174 175 178 181 9.0% 132 133 134 136 138 9.5% 96 96 97 98 99 10.0% 62 62 63 63 64 WACC 10.5% 30 30 31 31 32 Cash and Investments to help fund equity gap The total fund requirement for the projects under construction is about INR 231 billion upto March 2012, of which about around INR 180 billion would be funded through debt and INR 51 billion through equity. Out of the debt requirement, the company has tied up for INR 157 billion already. Tata Power expects INR 28 billion of the total equity contribution to be funded from internal accruals. Tata Power has issued FCCB which could be exercised at a pre-determined price of INR 590 prior to February 2010. We expect these to be exercised by bond holders, thus increasing the company's share capital. We expect the company to use proceeds of INR 1 billion from the FCCB conversions to fund its power projects. We believe that the strong cash flow from the standalone business should aid Tata Power in funding its requirements. For the balance, the company is exploring options of disinvestment of its various holdings/assets or equity dilution through warrants, preferential issue and/or rights if required. Tata Power, which holds about 11% stake in TTSL, recently sold a part of its holding in TTSL for INR 3.16 billion. The deal is part of Japan's NTT DoCoMo's USD 2.7 billion investment to pick up 26% in Tata Teleservices. The deal is through partial buyout of (6%) of existing shareholders Tata Sons, Tata Steel, Tata Power and Tata Comm, which hold stakes in TTSL and fresh issue of shares (20%).
April 6, 2009 For Private Circulation Only 16 Tata Power - Investments Company Value of Investment Value Per Share (INR mn) Marketable Securities 347.5 1.6 Tata Projects Ltd 935.1 4.2 Panatone Finvest Ltd 5500.0 24.7 Tata Sons 2661.5 12.0 Other 2149.8 9.7 Tata Comm 1305.2 5.9 Tata Teleservices 54830.8 246.4 TTML 3432.5 15.4 Total Value of Investments 319.8 40% holding co discount 191.9 Expanding portfolio in renewable energy TPC is targeting a renewables portfolio of 25% of the total power generation capacity in the next 10 years. Tata Power's current wind energy portfolio is at 124 MW, which it plans to scale up to ~200 MW by the start of next fiscal.
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April 6, 2009 For Private Circulation Only 17 Geothermal Energy Tata Power has acquired an 11.4 per cent stake in Geodynamics Ltd, an Australian company specializing in geothermal energy, for INR 1.65 Billion. The technology has been proved and the Australian company is setting up its pilot geothermal plant there in next few months. Once the pilot project is successful, the company will start generation at a commercial level. He said Tata Power has already signed MoU with Govt. of Gujarat for 5 MW geothermal plant and is also looking at exploring three geothermal belts in the south, north and central parts of India. Brown Coal Technology Tata Power along with Brisbane- based engineering company Sedgman Ltd has acquired a 5% stake in an Australian firm, Exergen Pty Ltd which has developed a process of removing moisture and contaminants from brown coal, enabling a reduction in harmful emissions when the fuel is burnt. The size and conditions of the investment are being kept confidential, but the money will help fund a USD 20 million engineering study to be conducted over the next eight to nine months. The partnership strengthens the company's renewable portfolio and creates opportunities to get a foothold in the growing renewable energy market in Australia. We have not considered earnings from these acquisitions in our estimates. Power Links and NDPL… successful Joint Ventures
PowerLinks Performance POWERLINKS TRANSMISSION LIMITED (PTL) is a 51:49 JV of Tata Power and Power Grid Corporation of India Limited. Tata Power, together with PGCIL, has set up the 1,200 km Tala transmission line, for extracting power from Bhutan and supplying it to the northern parts of India. The company will earn a ROE of 16% on the project, post recent regulatory changes made by CERC. As per the new tariff norms, the shift towards higher RoE will have a positive impact on Powerlinks. The company has recorded a profit of INR 317 million in 9M FY09 (against INR 224 million in 9M FY08), an increase of 42.9%. After successful completion of the first Inter-state Transmisison Line Project, the Powerlinks has forayed into new business areas viz. Project Management Consultancy & Inspection Services. Valuation We have valued Tata Power's stake in Translink at INR … per share, based on price to book value of 1.4x, as it generates regulated 16% ROE.
NDPL Performance NDPL is a 51:49 JV of Tata Power and Delhi Vidyut Praday Nigam (a Govt of Delhi undertaking), which manages power distribution in North Delhi. NDPL earns a 16% ROE on the regulatory capital base and also an incentive if it reduces AT&C losses below the Delhi Government's stipulated level of 22%. NDPL has reduced its ATC losses from a high of 53% to less than 20% during 2007-08. In 9M FY09, NDPL has reported a profit of INR 1170.9 million (against INR 1095.0 million in 9MFY08), an increase of 7%.
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April 6, 2009 For Private Circulation Only 18 Tata Power and BSES (now Reliance Infra) were the two companies that were awarded the three distribution circles in Delhi in July 2002. NDPL is Tata Power's joint-venture company while BRPL and BYPL are Reliance Energy's joint-venture companies operating in Delhi. NDPL's performance in Delhi has been superior to that of BRPL and BYPL. Valuation We have valued Tata Power's stake in NDPL at INR …per share, based on price to book value of 1.4x, since it is a regulated business generating fixed returns on equity. Through its efficient operations and investment in technology, We believe NDPL's AT&C loss levels will remain below 17% going forward.
TATA BP Solar… Energizing future About the company Tata BP Solar, a Tata Power and BP Solar joint venture, has been leading India's solar industry for over 15 years. Today, it is India's largest solar photo voltaic manufacturing company, and the largest manufacturer of solar water heaters in India. The company's solar photovoltaic and thermal solutions products business has been profitable from the very beginning. It is the market leader in India with 30 per cent market share. From a turnover of INR 16 million in 1991-92, the company has grown to INR 9100 million in 2007-08 (nearly 40 per cent growth over the last financial year). The company targets to become a billion dollar 300 MW plus solar power producing company touching a billion lives in the medium term.
Expanding Capacity The company capitalized the 36 MW cell and the 40 MW module plants during the second half of the year 2007-08. In its endeavour to achieve the 300 MW target, the company has already invested over INR 3.5 billion in this fiscal for manufacturing an additional 128 MW of solar cells and 70 MW of solar modules. The project, funded by Calyon Bank (Credit Agricole CIB) and BNP Paribas, among others, is progressing and is expected to be completed during the second half of this fiscal.
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Solar Energy Market The solar energy market is growing 45 per cent year-on-year and the opportunities in the emerging markets are enormous. The business model of the company covers the whole ambit of rural, urban, household and enterprise clientele. The company acts as a one-stop shop providing project management expertise and complete solutions - from consultancy to installation (a key differentiator from competitors). A new area of business is telecommunication where solar powered telecommunication networks have been found to be far more cost-effective and hassle free than diesel-powered ones. The company provides solar power for telecommunications in thousands of villages in the country and work with all leading companies - Airtel, Alcatel, Nokia, Reliance, Tata Teleservices, and Vodafone. The company's products also provide power to Nepal Telecom Corporation and Bhutan Telecom.
April 6, 2009 For Private Circulation Only 19 Railways is another key area where solar energy plays a crucial role. Indian Railways has the largest network across urban as well as remote areas. Tata BP Solar partners with Indian Railways to power signal controls and signal lighting thereby averting potential accidents. The company has successfully executed projects in Afghanistan, Bangladesh, Bhutan, Maldives, Nepal and Sri Lanka. More than 60 per cent of sales come from exports to markets in Europe and the US. Through BP Solar, it is the preferred vendor in Germany. To widen its reach, Tata BP Solar has tied up with Tata Agrico's pan-India network of retailers for distribution of solar lanterns, solar streetlights and water heating systems in the rural and semi-urban areas. The partnership is already active in Bihar and Orissa (eastern India), and parts of Maharashtra (western India) and Karnataka (southern India). At present, the company is expanding the concept of decentralized distributed generation - in other words, generation and service of power at the point of consumption, instead of routing electricity through a network. In this form of power generation, customers can install a mini solar power station on the premises to feed power to the building; any surplus is redirected into the grid and sold. This enables its clients to earn while save. Customers A few corporate organisations which rely on Tata BP Solar for their energy needs Bank of India uses solar energy to power 140 rural branches. Ginger hotels adds a warm touch to its hospitality with solar water heaters from Tata BP Solar. The multi-location installations will save carbon emissions up to 1.5L tonnes/year. Infosys uses solar water heating systems at its campuses in Bangalore, Mysore, Chandigarh, Pune and Bhubaneshwar. Larsen & Toubro's electrical business group at Navi Mumbai in western India has a 49.5kwp solar grid connect power plant that generates 56,000kwhr electricity annually and meets internal lighting needs. Oil and Natural Gas Corporation oil platforms in the Arabian Sea use Tata BP Solar's power system for gas detection and telemetry. Hindustan Petroleum Corporation has 38 outlets powered by solar energy. The Samudra Institute of Maritime Studies at Lonavala in western India is located in a valley surrounded by a mountain range; it has its façade fitted with Tata BP Solar's building integrated photovoltaic (BIPV) system - one of the large BIPV installations in India. Global Solar Energy Market The European photovoltaic industry has been growing robustly and worth •14 Billion every year. This is largely driven by rising demand for clean energy and depleting fossil fuels. During this month's (March 2009) Sustainable Energy Week event in Brussels, the EU Commission presented the Strategic European Technology Plan for Renewable Energy. Solar plays a strategic part of the plan and it will generate 15 percent, 12 percent by PV electricity and 3 percent by concentrating solar thermal systems, of the region's electricity demand by 2020.
April 6, 2009 For Private Circulation Only 20 To support its member states in achieving these binding targets, the EU Commission is fostering public/private partnerships to more quickly deploy solar energy. Large solar power plants, urban integration, i.e., solar cities, and transnational rural electrification will help accelerate solar energy deployments. Obama administration is also considering ways to boost the solar market in U.S.
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Solar World of Germany and BP Solar of the United Kingdom are examples of European cell/module producers that have sought to leverage their success in Europe and have invested in the emerging US market to try and to take advantage of invigorated government incentives there. We expect Tata BP Solar to be a major beneficiary as PV demand expands around the world in the coming years. Valuation Tata Power SED… gaining credibility as a partner for Indian Defence The Tata Power Company Limited, through its Strategic Electronics Division (Tata Power SED), has been a leading private sector player in indigenous design, development, production and supply of defence systems. For close to four decades, Tata Power SED has partnered the Ministry of Defence (MoD), the Armed Forces, DPSUs and DRDO with development & supply of state-of-the-art sub- systems and has now evolved into a Systems Integrator for programs of national importance such as the Pinaka MBRL System, Launchers for the Akash Air Force and Army Programs, Electronic Warfare Program, and Command & Control Systems for Air Defence and Naval Combat. Tata Power SED's design and development facility is located in Mumbai. The manufacturing facility is located at Bangalore. …stepping up revenues through its strategic electronics division… The division has bagged licenses for developing mission-critical electronic warfare systems for the Indian military. Department of industrial policy and promotion, which comes under ministry of commerce and industry, has issued seven licenses to Tata Power SED. These licenses will enable the company to be prime contractor to the Ministry of Defence for designing, development, manufacturing, assembling and upgrading of mission critical systems in seven core areas of defence strategic electronics. Over the next five years these licenses will open a domestic addressable market of over INR 200 billion for the company. The division recently bagged a prestigious order worth INR 1.82 billion to manufacture '16 Akash Launchers' to be delivered in next 33 months. Projects in Pipeline Tata Power plans to set up a 1,000 MW coal-fired thermal power project at Naraj Marthapur, Orissa, through a public-private partnership (PPP). A 1270 MW captive power project for Tata Steel will also come up at the same location. The company will use coal from the Mandakini coal blocks in Orissa, allotted to the company jointly with the Jindal Group and Monnet Ispat, to boost power generation capacity in the state. About 1,500 acres are required for the project and the company has begun the process of land acquisition. Tata Power is also planning a 500 MW Tubed coal power project at Jharkhand with captive coal mines. It has already formed a joint venture with Hindalco and Tubed Coal Mining for coal mining.
April 6, 2009 For Private Circulation Only 21 Another 2,400 mw project will come up at Shahpur in Maharashtra, which will have 1,400 mw installed capacity in the first phase. About 540 acres of land has been acquired and the company expects the first phase to take off by 2012. Tata Power is in talks with the state government for further acquisition of land. The Coastal Maharshtra Project has been delayed and the management feels that the process will speed up only after the elections now. The company has diverted the coal for this project to its Mundra UMPP. We have not factored the revenue from projects in pipeline in our estimates. Captive Coal Blocks Tubed Coal Block Mandakini Coal Block Location Latehar, Jharkhand Angul, Orrisa Allocation 5.75 MTPA 7.5 MTPA Joint companies Hindalco Monnet Ispat & Energy, Jindal Photo TPC's Share 2.3 MTPA 2.5 MTPA Expected Production date Sep-11 Jul-11 Usability of coal mined 500 MW 1000 MW Projects in Pipeline Project Name/ Proposed Fuel Type Fuel Linkage Selling Location Capacity Arrangement Coastal Maharashtra 2400 Imported Coal KPC (Indonesian Mines) Merchant Naraj marthapur CPP 1270 Arrangement - CPP Naraj marthapur IPP 1000 Domestic coal Mandakini Coal Block IPP Jharkand 500 Arrangement Supply by Tata Steel CPP Tubed 500 Domestic Coal Captive Coal Block IPP
April 6, 2009 For Private Circulation Only 22 INDUSTRY OUTLOOK India's power deficit is likely to remain … The country is experiencing huge shortages in power due to demand driven by the booming economy and rapid industrialization. Therefore, capacity expansion, increase in generation, transmission, distribution is essential to meet the growing demand for power. It is estimated, that a capacity addition of over 100 GW units by 2012 is required to bridge the supply deficit and keep up with the increasing demand. India's electricity generation capacity stood at 147.4GW as of Jan 2009. The Eleventh Five-Year Plan (2007-12) envisages capacity additions of 78.5 GW, with active participation of both private and public utilities. India's actual capacity has lagged the target capacity addition over the Plan Periods. In the current Plan Period, India added 15.1 GW of capacity till January 2009. In view of growing demand of electricity, the Indian government has identified UMPPs, which will use supper critical technology to achieve higher levels of fuel efficiency. These projects are large-sized; each project has a capacity of around 4,000 MW and will involve an estimated investment of around INR 160 billion. Though we remain doubtful about achieving the target additions, given the past record, achieving even 75% of the target addition will be a marked improvement for the power sector. The slippages in planned additions, has led to a power shortage situation in the country. The India has the lowest per-capita electricity consumption among the developed/major developing economies, mainly because of a lack of adequate generation capacity and poor transmission infrastructure.
India's energy requirement during April-January 2009 stood at 545,789 MU and energy availability during the same period was 574,562 MU, resulting in an energy shortage of 71,227 MU (11%). According to CEA's 17th EPS (electric power survey), peak demand is expected to increase by a staggering 77% to 157,107 MW by 2012. Similarly, the energy requirement is expected to increase by 274% to 975,222 MU by 2012.
April 6, 2009 For Private Circulation Only 23 Profit and Loss Statement Ratios
FYE March, INR mn FY08 FY09E FY10E FY11E FYE March FY08 FY09E FY10E FY11E
Interest earned 93,016 118,461 140,413 165,348 Valuation Ratios
Interest expended 63,610 79,634 95,974 112,542 P/E (x) 5.6 4.3 4.1 3.6
Net interest income 29,406 38,827 44,439 52,805 P/BV (x) 1.1 0.9 0.7 0.6
Non-interest income 12,327 14,064 14,800 15,184 P/ABV (x) 1.4 1.1 0.9 0.8 Non-int income (ex-treasury) 9,429 11,514 12,800 13,584 Operating expenses 15,930 21,973 24,148 26,399 Return Ratios (%) Pre-provisioning profits 25,803 30,918 35,091 41,590 Interest spread 3.0 3.2 2.9 2.9 Provisions & contingencies 7,199 6,125 8,810 11,759 Net interest margin 2.9 3.1 2.9 2.9 PBT 18,604 24,793 26,281 29,832 Yield on advances 9.8 10.7 10.3 10.2 Income tax, Interest tax 4,734 6,694 7,359 8,353 Yield on investments 7.7 7.1 7.0 7.0 Net profit 13,870 18,099 18,922 21,479 Cost of funds 6.2 6.3 6.3 6.2
Non-int Inc/ Total income 29.5 26.6 25.0 22.3 Balance Sheet Opex cost/ Total income 38.2 41.5 40.8 38.8 FYE March, INR mn FY08 FY09E FY10E FY11E Return on average net worth 22.1 22.3 19.6 19.0 Cash in hand & bal with RBI 94,547 69,442 83,372 100,046 Return on average assets 1.2 1.3 1.1 1.1 Bal with banks, Money at call 6,431 19,654 23,596 28,315 Investments 338,226 439,694 505,648 584,396 Growth Ratios (%) Advances 743,483 933,071 1,133,681 1,354,749 Net interest income 11.6 32.0 14.5 18.8 Fixed assets (net) 22,004 22,554 23,118 24,274 Non-interest Income 46.4 14.1 5.2 2.6 Other assets 36,041 38,136 41,954 48,636 Non-int Inc (Ex- Treasury) 28.6 22.1 11.2 6.1 Total assets 1,240,733 1,522,552 1,811,369 2,140,416 Total income 20.0 26.7 12.0 14.8 Equity capital 5,051 5,051 5,051 5,051 Pre-provisioning profit 29.0 19.8 13.5 18.5 Reserves & surplus 68,426 83,669 99,165 117,217 Net profit 64.1 30.5 4.6 13.5 Net worth 73,477 88,720 104,216 122,268 EPS 64.1 30.5 4.6 13.5 Deposits 1,038,586 1,310,235 1,573,048 1,887,658 Advances 19.2 25.5 21.5 19.5 CASA deposits 362,040 410,429 502,279 609,713 Deposits 21.9 26.2 20.1 20.0 Term deposits 676,546 899,806 1,070,769 1,277,944 Investments 20.9 30.0 15.0 15.6 Borrowings (+sub-ord bonds) 85,105 77,584 83,392 87,582 Adjusted Book value 33.0 27.0 17.9 17.4 Other liabilities & provisions 43,564 46,013 50,713 42,908
Total liabilities 1,240,733 1,522,552 1,811,369 2,140,416 Asset Quality (%) Per Share Data Proportion of CASA deposits 34.9 31.3 31.9 32.3 Credit-Deposit ratio 71.6 71.2 72.1 71.8 FYE March FY08 FY09E FY10E FY11E Investment/Deposit 32.6 33.6 32.1 31.0 Shares outstanding (mn) 505.1 505.1 505.1 505.1 FDEPS (Rs) 27.5 35.8 37.5 42.5 Gross NPA 2.2 2.2 2.6 3.0 DPS (Rs) 4.0 5.0 6.0 6.0 Net NPA ratio 0.2 0.3 0.5 0.7 Book value (Rs) 145.5 175.6 206.3 242.1 CAR 11.7 12.2 11.8 11.1 Adjusted book value (Rs) 108.8 138.2 162.9 191.2 Tier-I ratio 7.0 7.7 7.2 7.0
April 6, 2009 For Private Circulation Only 24 ANALYST DISCLAIMER: Each analyst of FINQUEST Securities (P) Ltd. whose name appears on page 1 of the research reports accessible on this website hereby certifies that (i) the recommendations and opinions expressed in the research report accurately reflect the research analyst's personal views about any and all of the securities or issuers discussed herein that are within the analyst’s coverage universe and (ii) no part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the provision of specific recommendations or views expressed by the research analyst in the research report.
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Outperformer Marketperformer Underperformer More than 10% to Index Within 0-10% to Index Less than 0-10% to Index