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Karvy Stock Broking has recommended 'Buy' on Tata Power Company with target price of Rs 97 as against current market price (CMP) of Rs 79 with 23% upside in its report.
Commenting on the investment rationale, Karvy Stock Broking said, ''Considering the peculiar nature of the PPAs, which totally vests the fuel risks on the petitioner, the effect of price escalation of coal as a result of Indonesian regulations can't be covered under the provisions of 'Change in Law' or 'force majeure'.
The Electricity Act-2003 vests in the Commission the responsibility to balance consumers' interest with project developers' interest, while regulating the tariff of the generating companies and transmission licensees. Financial viability of the generating stations is an important consideration to enable them to continue to supply power to the consumers.
Petitioner's plea deserves serious consideration and in depth examination of facts to address its concern. Unless the concerns of the petitioner are addressed, the possibility of the petitioner defaulting in discharging its obligations under the PPA due to the perceived financial burden can't be totally ruled out and that will affect the interest of the consumers. In that event, the respondents shall be required to invite fresh bids to meet their requirement of power and till the selected project or projects are operationalized, CERC are not inclined to favour any renegotiation of the tariff discovered through the process of competitive bidding; the sanctity of the bids should be maintained. The parties should confer to find out and agree to a compensation package to deal with the impact of subsequent event, which has adversely affected performance under the PPAs.
In the present case, the escalation in price of imported coal on account of Indonesian regulation is a temporary phenomenon and will be stabilized after some time. Therefore, the petitioner needs to be compensated for the intervening period with a compensation package over and above the tariff discovered through the competitive bidding.
We believe implementation of compensatory tariff in right spirit will be positive for Tata Power. At CMP, as the stock trades at 6.5xFY15E EV/EBITDA & 1.8x FY15E P/BV, we believe many negatives have already factored in the price. Thus, we reiterate our Buy recommendation on Tata Power with target price of Rs. 97 a share, implying 23% upside from the CMP with option value of Rs 10 a share.''
