Tata Power hosted an earnings call to update investors on the ever continuing negotiations on the loss making Mundra power plant-as new legal advisory has suggested that the company need not have a buy-in from all five procurers to amend the power purchase agreement, and the company remains optimistic as three procurers accounting for 80% of the capacity are aligned to accept a modified PPA as per the recommendations of the high-powered committee.
In the continuing dialogue between Tata Power and the five procuring states to resolve the under-recovery for Mundra-a new legal opinion that allows for each procuring state to individually amend their PPAs may help end the imbroglio. Tata Power management on a call stated that three states accounting for 3.2 GW (80%) viz. Gujarat, Maharashtra and Punjab are already in favour of signing an amended PPA, while two other states Rajasthan and Haryana will come back in due course.
Given the low fuel cost of Mundra, extant states are likely willing to procure the balance 800 MW that may be released by Rajasthan and Haryana for which the latter will be compensated with 20% of capacity charges (Rs 0.2/kwh).
We note that lowered fuel cost makes the current timing most suited to sign-off on amended PPAs, a process that will likely have to wait for the current lock-down situation (due to Covid- 19) to be behind us. We note that Mundra had average fuel cost under-recovery of Rs 0.5/kwh in M9FY20 that would likely yield a compensation of Rs 0.15/kwh (adjusting for base loss of Rs 0.35/kwh to be borne by lenders and project owners) and help reduce losses by Rs 3.7 bn (Rs 1.38/share) for FY20E. We note that in FY19 the fuel cost under-recovery was Rs 0.8/kwh and would have yielded compensations of Rs 0.5/kwh or Rs 12 bn (Rs 4.4/share).
Tata Power is targeting asset monetisation of Rs 50 bn in FY21E itself-on the back of continued payments for sale of Arutmin (Rs 5 bn), potential sale of smaller coal mines in Indonesia, shipping business (Rs 28 bn), wind assets in South Africa (Rs 8 bn) and hydro plants in Zambia. Management highlighted that monetisation of Tata Projects has been more time consuming and will likely be pushed back to FY22E.
We maintain our ‘buy’ rating on Tata Power with a revised fair value of Rs 60/share (from Rs 72/share). The revision in our fair value estimate is primarily driven by lower value for Tata Power's investment in Tata Sons as the value of various listed entities has come off significantly in recent times. We note that approval of compensatory tariff for Mundra could add as much as Rs 20/share to our fair value estimate.