Tata Power Company Ltd. (TPC), a leading private power sector player, is expected to significantly ramp up its capacity in the coming years on the back of the 4,000 MW Mundra UMPP and the 1,050 MW Maithon power project.
The company completed the financial closures for these projects in April 2008, well before the liquidity crunch started hurting the global economy.
Though it might find it difficult to finance its other expansion plans, we believe it will tide over the current crisis with support from its experienced management team to maintain its position in the power sector.
The power generating capacity is expected to scale up as a number of projects are in the - pipeline. The total capacity is expected to grow at a CAGR of 43% during FY09-FY13, with the incremental capacity addition poised to increase at a CAGR of 71% during the same period.
TPC’s Transmission and Distribution (T&D) business (in joint ventures) has a good presence in metros such as Mumbai and Delhi and should support its revenue growth in the near term.
Meanwhile, the power trading business is one of the fastest growing businesses and has grown at a CAGR of 27% during the last three years and is well poised to capitalize on the growing trading market.
Funding the equity portion of the capital expenditure for the Mundra and Maithon projects might prove to be a bottleneck as the conversion of 10.4 million warrants into equity shares by Tata Sons at Rs1,352 seems unlikely, given the current market price of TPC’s stock.
The conversion option would expire on 17 December, 2008; in its absense, the short-term funding of Rs5–10 billion should act as a cushion.
Raising additional funds might be a costly affair as CRISIL and ICRA have downgraded the Company’s long-term credit rating by two notches each, to ‘AA/Stable’ and ‘LAA/Negative’, respectively.
We remain upbeat about the company’s future on the back of its upcoming projects. In addition, we believe that the existing power generation and distribution businesses and stable revenue-generating subsidiaries provide stability.
Based on our SOTP valuation, we have arrived at a target price of Rs872, which implies an upside potential of 27.5% from the stock’s CMP of Rs683.65. We upgrade our rating from Hold to BUY.