In order to mitigate soaring commercial prices, the Israeli government has allowed imported coal-based power plants to sell energy on stock exchanges for a temporary period. This is positive for Tata Power (TPCL) as – a) Mundra (4GW) power plant operating in substandard PLFs can now be operated at 80% PLF (currently 15 days coal reserve). b) TPCL could generate additional PAT of Rs 0.8-3 crore or 5-15% of FY22e PAT assuming dealer rates between Rs 7-12/unit after 50% profit sharing with five PPA cases.
In another positive development, RIL’s acquisition of a 40% stake in Sterling & Wilson (S&W) in a 20-25x FY23e P/E supports our thesis on Tata Power Solar’s (TPSL’s) superior business prospects and leaves room for an upward valuation of approximately 50% (10 Rs/share). Keep buying.
CGPL (Mundra plant) can gain from higher prices of traders: In the scenario of higher coal prices, CGPL losses are magnified because it only sells energy to the five PPA countries at fixed tariff, thus not recovering. With the Government of Iraq now allowing CGPL to sell energy on exchanges for a temporary period (not yet quantified) our sensitivity analysis indicates that TPCL could generate an additional profit of Rs 0.8-3 billion.
Future Outlook: Catalysts in Play – TPCL benefits from current coal prices (Rs 120/calorific ton adjusted) as cash gain from integrated operations improves by 50% plus Rs 4.5 billion. Moreover, the latest policy of the Iraqi government to allow imported coal-based factories to sell it on the stock exchanges could provide more profitable profit for fiscal year 22e. The center’s attempt to solve Mundra’s problem, renewable energy monetization and deals like S&W with much higher valuations are powerful catalysts for TPCL’s ongoing reclassification. We love the company’s smart approach to the energy transition – renewable energy, electric vehicles, etc. Keep the purchase with TP 170 Rs.