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Tata Power set to gain from rising coal prices; JSW Energy, Torrent may lose: JM Financial

The biggest losers are utilities that do not have long-term power purchase agreements for the electricity they generate.

March 22, 2022 / 10:33 AM IST
 
 
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Tata Power is the only Indian utility company that is likely to benefit from rising costs of imported fuel, while JSW Energy and Torrent Power may be negatively affected, a brokerage said.

The conflict in Eastern Europe is pushing up prices of imported coal and natural gas, hurting the profitability of power utility companies. The biggest losers are companies that do not have the backing of long-term power purchase agreements (PPA) for the electricity they generate.

The average price of imported coal climbed to about $203 per tonne in March, according to the HBA Index, also known as the Indonesian Coal Index. Asia Spot LNG prices surged to $39/metric million British thermal unit (MMBtu). These prices are still lower than the October 2021 peak of $217/tonne and $48/MMBtu for coal and gas, respectively.

Brokerage firm JM Financial Institutional Securities has categorised power utilities into three buckets based on the impact of coal/gas prices on their profitability – those likely to have a positive impact, a negative impact and no impact.

Positive impact

Tata Power is the only utility company that is likely to gain from the rise in fuel prices, according to JM Financial’s report. The benefit comes from the company’s 30 percent stake in Indonesian coal mines, where it earns profit on coal.

Tata Power uses imported coal to fire its 4,000 MW Ultra Mega Power Plant at Mundra. At the current high levels of international coal prices, the company is expected to gain from higher realisations at its Indonesian coal mines.

“However, the UMPP which consumes imported coal, turns uneconomical at these coal prices and will most likely remain shut, resulting in an implied loss of Rs 2,000 crore/year,” JM Financial said in the report.

The plant has been operating at 20 percent of capacity (800 MW) on a temporary fuel cost passthrough mechanism with Gujarat Discom, which lapsed in December.

JM Financial said it estimates the UMPP and the coal mines will turn profitable at HBA index prices of more than $125-130/tonne, even with the Mundra plant incurring Rs 2,000 crore of shutdown losses.

Experts said that every $10/tonne change in coal realisations impacts FY23 estimates by 14-15 percent.

The Tata Power management is hopeful of a permanent resolution of UMPP tariffs with fuel cost passthrough with Gujarat Discom, but it may entail offset of proportionate coal profits, for which details are awaited.

After assuming international coal prices of $200/tonne and fuel cost passthrough for the UMPP, JM Financial estimates a target price of Rs 265/share for Tata Power (Rs 228 on the BSE on March 21) thereby implying a limited upside for the stock. It recommends a ‘hold’ for the stock.

Negative impact

Rising fuel prices will in all likelihood have a highly negative impact on JSW Energy and Torrent Power.

JSW Energy has 66 percent of its 3.2 GW thermal capacity fuelled by imported coal, of which 600 MW lack PPAs.

At March imported coal prices of $200/tonne, JM Financial estimates the power price to be about Rs 7.8 per kilowatt hour (at 15 percent RoE) compared with merchant prices of Rs 6-7/kWh this month.

Rising coal prices may imply 600 MW of merchant capacity will be on shutdown mode, resulting in fixed cost under-recovery. JM Financial estimates a fixed cost under-recovery of Rs 170 crore, implying a 15 percent downside to its FY23 profit after tax estimate, which assumes plants will run at low peak load factors.

The stock currently trades at Rs 302 (35x FY24 EPS) vs our target price of Rs 220 in the most optimistic scenario, JM Financial said, recommending a ‘sell’ on the stock.

Torrent Power has 2.7 GW of its capacity based on imported LNG, of which 1.3 GW is without a PPA. Additionally, its PPA for 278 MW of the Unosugen plant, adjacent to the Sugen units near Surat, has a tariff cap of Rs 5.6/kWh at an implied gas price of $8-9/MMBtu. At gas prices of $22/MMBtu (in February), these capacities are likely to remain shut.

“We estimate Sugen/Unosugen plants turning uneconomical at gas prices >$8-9/MMBtu (implied tariffs >Rs 6-7/kWh). While Sugen can earn regulated RoEs based on plant availability, it may lose efficiency gains (estimated at ~Rs 50 crore/year). Further, the Unosugen PPA has a tariff cap of Rs 5.6/kWh including fixed cost, at an implied gas price of $7-8/MMBtu vs $22 in 3QFY22,” JM Financial highlighted.

The brokerage maintains a ‘sell’ on the stock, which it finds expensive at 15x FY24 P/E given limited growth visibility and the looming threat of high gas prices.

No Impact

NTPC and Calcutta Electricity Supply Company (CESC) are likely to sail through the current scenario without any impact on their profitability.

NTPC enjoys the benefits of cost passthrough under its PPAs and has fuel supply agreements for its coal requirements at regulated prices. These arrangements will shield the company from any negative impact resulting from a surge in coal prices.

For CESC, 87 percent of its thermal capacity is tied up under long-term PPAs. The remaining 13 percent (Dhariwal unit 1) has a short-term PPA and FSA for coal supply with South Eastern Coalfields, which limits the impact of any surge in coal and gas prices.

Disclaimer: The views and investment tips of investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before making any investment decisions.

Gaurav Sharma

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