Stock Review: Tata Power

Tata Power has called off the agreement it entered into with private equity firm Olympus Capital six months ago to sell 15 per cent stake in two special purpose vehicles (SPVs) that together own 30 per cent stake in KPC (Kaltim Prima Coal) and Arutmin mines of Indonesia-based Bumi Resources Holdings.

It reasoned that certain conditions in the investment agreement had not been met. The 15-per cent stake sale for $300 million had valued Tata Power's stake at $2 billion (28 per cent of the company's current market capitalisation).

If the deal had fructified, the company could have achieved its stated objective of reducing debt in the SPV ($647 million). However, the company will now benefit from high coal prices, which is expected to more than compensate for the interest cost on its SPV debt.

Realisation from coal is rising due to robust demand from Japan, China and India. The profits from the mines contribute about 50 per cent to Tata Power's consolidated profit. Also, Bumi plans to almost double production to 110 million tonnes a year by calendar year 2012.

The deal cancellation and expectation of a new investor coming in at a higher valuation provide a new trigger to the stock, which has been underperforming the Sensex for the last six months amid the suppressed performance of power stocks.

Meanwhile, the company's power projects are progressing according to schedule and analysts are confident of the company almost doubling its operational capacity of 3,000 Mw by 201112. Among others, the first unit at Maithon (1,050 Mw) is expected to be commissioned in the March quarter and will contribute fully in 2011-12. The company also plans to commission the first unit of the Mundra ultra mega power project (4,000 Mw) before the target of September.

For now, the company is better off without the stake sale in Indonesian mines due to the outlook on coal prices