The brokerage said that the coal prices could be driven higher due to escalating energy supply-chain disruptions, which are stemming from the US-Iran-Israel conflict. Oil prices have already crossed the $80 mark, while LNG supply is hurt due to the drone attacks in Qatar.
In light of this, IIFL believes that Tata Power stands to gain on two fronts:
First, in light of any increase in coal prices, its Indonesian Coal mining operations could see a recovery in profits as every $20 per tonne increase in price will increase consolidated earnings by 10%, according to IIFL.Second, any expedited resolution of the issues at Mundra, which has been under shutdown since the second quarter, and has weighed on the company’s profitability for the first nine months of the year by ₹1,000 crore, can also be a positive. The brokerage is of the view that a sustained rise in coal prices, along with uncertainty along LNG supply and an elevated summer power demand scenario could catalyse a resolution at Mundra.
Profits of Tata Power’s coal mining business are at a cyclical low, currently ranging between ₹400 crore to ₹500 crore and contributed to only 11% of the company’s consolidated profits for the first nine months of the year.
Tata Power shares are trading at a 12-month forward Enterprise Value to EBITDA multiple of 10 times, which is lower than its long-term median of 11 times.
23 analysts have coverage on Tata Power, of which 11 have a “buy” rating, seven say “hold”, while five have a “sell” rating.
Shares of Tata Power ended 2.5% lower on Monday at ₹368.15. The stock has gained only 6% in the last 12 months.
