Stock Review: DLF

FROMthe start of this year, a segment of analysts has held on to its bullish view on the real estate sector. After eight months and 11 rate increases, things have only worsened for developers. The BSE Realty Index lost 15 per cent of its market cap in August. All these factors have hit the country's largest developer DLF, too, even as analysts maintained their bullish view in the hope the company would improve its cash flows. However, the Competition Commission of India's (CCI) August 12 order on DLF has come as the proverbial straw on the camel's back. CCI levied a penalty of `630 crore on DLF, which is seven per cent of the average turnover over the last three years. According to Emkay Global, after the recent order on the company due to complaints by Belaire Association, CCI has received more than 10 complaints from other DLF projects' associations such as Park Place, Magnolias, Aralias and New Township Heights. The commission is scrutinising these. While DLF can appeal to an appellate tribunal and even as CCI's penalty charges will not increase, the consumer associations can increase their demands for compensation. Even if DLF strikes an out-of-court settlement with consumers, the CCI order will stand, explains Emkay Global's analysis, on the basis of an interaction with CCI member R Prasad. On Tuesday, as news of stock downgrades started coming in, DLF shares fell 4.43 per cent to `199. Morgan Stanley downgraded the company's stock on the belief the company "could remain in a financially tight situation in terms of lower profits and stretched balance sheet for the next few quarters. Hence, we have downgraded our rating to equal weight and our new price target is `177." Also, with the macroeconomic situation continuing to worsen, all hopes of the company improving its sales seem to be diminishing. DLF's new sales have been stagnant for three years at 10-12 million sqft ( `6,000-7,000 crore) and the land under execution has been flat for the last six quarters, explains Morgan Stanley. As the older projects get delivered over four-six quarters, DLF will become more dependent on new launches for cash generation. In addition, high input costs and higher interest expense will hurt earnings. Though analysts expect the company to seriously start reducing debt from the third quarter of FY12, it is unlikely to result in a rerating.

 

 

Stock Review: TATA POWER

Tata Power touched a 52-week low of `995.2 on September 5, amid growing concerns about the impact of higher imported coal costs on its flagship Ultra Mega Power Project (UMPP) at Mundra in Gujarat's Kutch district, after the change in mining laws by the Indonesian government. And, recent reports suggest the Gujarat government, which had signed to buy about 2,000 Mw from there, is not in a mood to pay the higher costs. Although the company is speaking to the Union government for a rate increase (as is Reliance Power for its UMPP in Andhra Pradesh), as well as planning other measures to mitigate the impact, the Street is not impressed. According to analysts, the Mundra UMPP is expected to incur losses, given the current rate structure and new higher costs. However, part of the costs will be compensated by higher coal realisations, due to its stake in Indonesian coal mines. In this backdrop, analysts are cautious in the medium term, despite an 18 per cent correction witnessed last month. Some have even downgraded their price targets and ratings. NEW RULES The Indonesian government recently implemented the Indonesian Coal Price Regulation, which requires prices for all transactions to be benchmarked against a set of international and domestic indices and all sale contracts to be modified retrospectively by September. Mundra (capacity of 4,000 Mw), India's first UMPP, is expected to be fully commissioned by 2012-13 (two units of 800 Mw each are expected to be commissioned by March 2012). It was awarded to Tata Power through competitive bidding, on a rate of `2.26 per unit. It has a 10.11-million tonne annual coal supply contract with its Indonesian coal companies (30 per cent stake each in KPC and Arutmin), part of which would be used in Mundra UMPP. In the original coal supply contract, Mundra UMPP was to get 75 per cent of the coal at index-linked prices, while the balance 25 per cent was to be supplied at a lower price (about $40 per tonne), fixed for five years. After five years, the entire quantity would come at market prices. With the change in mining policy, the fuel costs are expected to rise by about $30-40 per tonne and, hence, the project is estimated to incur losses if the company is unable to pass on the higher costs. Analysts peg the gross impact of this move on Mundra's profitability at about $500 million over five years. Meanwhile, the management has presented its case to the Indonesian government and has also asked the Union power ministry here to discuss the higher cost of coal with state electricity boards (SEBs). Analysts say the government is unlikely to intervene, as other private players would then ask for the same treatment. While the company is also looking at options such as blending cheaper low-calorific coal to rationalise the cost, the move could impact efficiency of the plant, say analysts. However, all is not over for the company. Losses at Mundra would also be mitigated through better financial performance of the coal business, thanks to higher coal realisations. The net impact on the combined valuation of Mundra and the mines is around five per cent. OUTLOOK Analysts have cut their target share price estimates by 17 per cent (consensus average) to adjust for losses in Mundra. Some, like Morgan Stanley and HSBC, have also downgraded their ratings. The outlook in the medium term is cautious but can change if the company is able to raise the mine capacity from the current 60 mt to 100 mt earlier than 2012-13, as that would help compensate for losses at Mundra—in other words, nullifying the impact at the consolidated level. Also, the company will have to exhibit faster progress on projects under development (of more than 5,000 Mw). Else, there is no significant capacity addition expected for the next three to four years, besides under-construction projects. Any rate rise accepted by SEBs fully or partially or a favourable decision by the Indonesian government would be a significant positive trigger.