Buy Tata Power; target of Rs 85: Edelweiss

Edelweis's research report on Tata Power

Tata Power Company’s (TPC) Q2FY17 performance reinforces the net long position/exposure of the company on coal. Uptick in global prices clearly reflected in the coal cost under-recovery in Mundra UMPP going up to INR 0.43/unit (INR 0.30 in Q1FY17). This was however offset by the improvement in coal business profitability (PAT of INR 1.7bn versus INR 1.2bn YoY), despite the moderate increase in average realisation due to lag effect. Following completion of Welspun Renewable acquisition, stock performance hinges on: a) potential returns from the acquisition; and b) Supreme Court’s resolution of Mundra UMPP compensatory tariff (CT). We have largely maintained our earnings (assuming favourable CT order) and maintain our SoTP-based TP of INR 85. Maintain ‘BUY’.

With completion of the Welspun deal, gross D/E ratio has gone up to 2.7x and hence potential returns/cash flows from the acquisition is critical. We continue to assume favourable outcome for the Mundra CT in our estimates and SoTP-based TP is INR 85. At CMP, the stock is trading at 1.2x FY17E and 1.1x FY18E P/BV. We maintain 'BUY/SP'.