Motilal recommends 'buy' on Tata Power

MUMBAI: Motilal Oswal Securities has recommended 'buy' on Tata Power for a target price of Rs 1,404. Power generation projects under implementation stands at 5,660MW, while projects under planning stage stand at 5,670 MW.

Successful implementation will result in eventual capacity at 12,861MW by FY14-15, from current 2,474MW. New project announcement includes, Tubed IPP (500MW), Naraj Marthapur CPP (1270MW) and Jharkhand CPP (500MW).

Updates on execution timeframes indicated that most of the projects currently under implementation (including Mundra 4000MW, Maithon 1050MW, etc) are ahead of schedule. This is commendable given the challenging environment in terms of project execution. The company now expects to commission Mundra UMPP (4000MW) by CY12 versus earlier CY14.

For Mundra Project, 50 per cent of coal requirement will have price variation linked to CERC index, and thus increase in fuel prices would be a pass through.

Also, the offtake agreement with Bumi entails that 25 per cent of the procurement will be on fixed prices for initial five years. Thus, of the total 10.7 million tonne of coal requirement for Mundra, exposure to variations in coal prices is for just 2.2 million tonne.

For projects under implementation stage (5,660 MW), Tata Power will require equity investment of Rs 60 billion, to be funded as - Rs 29 billion through internal accruals, Rs 19 billion raised through preferential issue /warrants and balance by either disinvestment of holding or equity dilution.

Moitlal expects Tata Power to report net profit (excluding share of profit from KPC and Arutmin mines of Bumi) of Rs 7.3 billion for FY08, Rs 8.1 billion in FY08 and Rs 9.9 billion in 2007. At the market price of Rs 1,211, the stock trades at PER of 31.8x FY09E and 28.4x FY10E.