We upgrade Tata Power to ‘overweight’ (earlier neutral) and raise sum-of-the-parts (SoTP) based September 2014 price target to R95 per share (versus Rs 88 per share), implying 30% potential upside over CMP. Relatively stable and regulated standalone business and strategic investments add up to 53% of our target at an implied value of 1.1x FY13 book value. The Arutmin deal unlocks value in Tata Power. Any CERC order on compensatory tariff (expected in next few weeks) is incrementally favourable for Mundra UMPP (negative 8.5% of SOP) earnings and NPV. Other regulated businesses (Delhi distribution, Maithon, IEL and Powerlinks transmission) make up for the balance value.
The rise of Rs 7 per share is due to our valuation of coal SPVs at $1,245 million, ~29% higher than earlier. Tata Power’s agreement to sell 30% stake in Arutmin mine back to Bakrie Group at $500 million is value accretive. The transaction sets an attractive valuation benchmark for its 30% stake in KPC mine, which remains intact. KPC’s marketable reserves and resources are over 3-4x of Arutmin, latest production is 1.8x, the underlying blocks are less dispersed and the period to license expiry is two years longer than Arutmin’s. Even after deep discount for ~15% lower cost of production at Arutmin versus KPC.