>TATA POWER (CITI)

Downgrade to Hold: Robust Fundamentals in the Price

■ Business fundamentals remain robust — Tata Power has plans to increase its capacity to 13GW (from 2.8GW) over the next 4-5 years. Good past execution record and significant progress on expansion projects gives us confidence. Business fundamentals remain robust with 92% YoY and 64% YoY Recurring PAT growth in FY09 and 1QFY10 respectively.

■ Recent positives: Mumbai open access & Freeing of 500MW from Apr10 — MERC has allowed distribution open access in Mumbai and ~ 45K retail consumers have applied to move to Tata Power from R-Infra. From Apr10 the company will also stop supplying 500 MW to R-Infra and this capacity will be free (200MW of hydel capacity would continue to be regulated).

■ But all these positives are in the price — We believe it is a little too early to value the ~ 6.2GW of pipeline projects where the company is yet to crystallize plans. As a consequence, after maintaining a Buy/ Low (1L) risk rating on the company for the last ~ 2 years, we downgrade Tata Power to Hold/ Low (2L).

■ Hiking our target price to Rs1389 — This factors in: 1) 29%-59% increase in EPS; 2) US$335mn of GDRs; and 3) Higher constructive valuations for subsidiaries and associates.

■ Why Hold and not Sell? — Amongst Indian private sector IPPs Tata Power seems to have a better execution track record, demonstrated progress on expansion projects and ability to achieve stated targets. All things being equal, we would consider becoming buyers if the shares correct to sub Rs1200 levels.

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