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Friday, September 2, 2011

Twist in Mundra tale

At the tariff end of Mundra UMPP (ultra-mega power project), 45% of the fuel cost is escalable and 55% is exposed to fluctuations in fuel cost. At the fuel supply end, 25% of coal was set to come at a fixed price for five years with remaining 75% at market prices. After five years the entire quantity would come at market prices. Indonesia has imposed a minimum sale price for coal, which is $35-40/ton, higher than the fixed price at which Tata Power is set to get 25% of Mundra UMPP’s requirement.

Tata Power is trying to represent to the government of Indonesia that the coal mine is integrated to the power plant so they should be given an exemption. However, we are unsure if the Indonesian government would give such an exemption. The company is evaluating options like sourcing coal from alternative mines which could be low grade.

According to media reports, in a communication to the power minister the CEO and ED of Mundra UMPP has said that coal prices have shot up so much that, at current rates, it was unviable. According to initial calculations of 14% RoE (return on equity), Mundra UMPP was supposed to make profits of R6 bn while the impact of the price change could be up to R18 bn. The company has also sought the ministry’s intervention to open a dialogue to address the issue of imported coal pricing. If the Indian government allows a pass through for the remaining 55% exposed portion or a smaller portion of the same, similar demands could be raised by other electric utilities, which would adversely affect the finances of the SEBs (state electricity boards).
As a consequence the economics of the Mundra UMPP + coal SPVs (special purpose vehicles) could get significantly impacted.
We believe the recent 16% stock correction already factors in the same from a DCF (discounted cash flow) perspective so we maintain a Buy (1L) rating, with a lower target price of R1,290.
Mundra UMPP is a 25-year duration project in which the losses will peak in FY14e (estimate) and then start coming off and will turn profitable by FY20e under the current coal price scenario. So even though the recent stock price correction factors in the new operating environment, we wonder if there will be more pressure on the stock.

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