Tata Power shares: We believe the best-case outcome for Mundra UMPP after the CERC-appointed committee report is a full pass-through of actual fuel costs if operations conform to normative levels of efficiency. However, this alone is not enough to turn the project profitable in the medium term. As per our analysis, bid tariffs on capacity charges, fuel transportation and handling are inadequate to cover non-coal expenses currently.
Our calculations imply an underrecovery of R0.18/kWh in FY15E, leading to loss of R4s 80 crore for Mundra UMPP at 80% PLF, even if a compensatory allowance is made for coal costs in tariffs. The losses should decrease progressively as project debt is repaid, but we estimate the UMPP will achieve PAT breakeven only by FY22. Our FCFE valuation of the UMPP (in the above scenario), after factoring in an offset in compensation for the share of gains attributable to the stake in Bumi, yields a negative value of R2.8/share of Tata Motors vs a negative value of Rs 10/share factored into our SOP currently. The best-case outcome still faces multiple hurdles — we maintain our neutral rating.
If lenders agree on a haircut on interest costs, provision for sale of short-term power is implemented and Tata Power is compensated for part of losses incurred so far. However an outcome leading to more than 0% RoE for Mundra UMPP appears unlikely.