>TATA POWER (RBS)

Tata Power's deal with Olympus Capital implies a US$2bn value for Tata's mine stake, which is lower than our attributed value of US$3.1bn. This leads us to lower our estimate for the mine stake to Rs305/share and roll back our SOTPbased target price to Rs1346. Consequently, we downgrade to Hold from Buy.

■ New deal with private equity player values Bumi stake at US$2bn
Tata Power has entered into a deal with private equity player Olympus Capital to sell 15% of its stake in the special purpose vehicles (SPVs) that own 30% of KPC and Arutmin. The 15% stake is valued at US$300m, implying a total equity value of US$2bn for Tata Power’s stake in the coal mines. The company has issued differential rights shares to Olympus Capital that are subject to capital protection arrangement. The capital protection arrangement is expected to be serviced either by funds from coal SPVs or by Tata Power.

■ Funds to be used for debt repayment and mine acquisitions
Tata Power’s management stated that it planned to use the proceeds to reduce debt related to coal mine acquisitions (US$694m outstanding as of March 2010) or to acquire additional coal mines overseas in order to ensure long-term fuel supply for its upcoming power projects. Currently, it has a take-or-pay arrangement of 10.1+20% MT with Indonesian coal mines and captive coal blocks at Mandakini (2.5MTPA) and Tubed (2.3MTPA) in India.

■ Power projects are on schedule
Tata Power plans to add 1,138MW of capacity in FY11, including the first unit of the Maithon project (1,050MW), for which a fuel-supply deal is already in place. Mundra UMPP is 52% complete, while management says the IEL Jojobera project is likely to happen in 2QFY11.

■ We revise our value estimates for the mines and downgrade to Hold
We had valued the company’s coal mines stake at US$3.1bn (US$2.5bn including a 20% holding discount, or Rs485/share). We now lower our estimate in the light of the deal, and value the company’s coal stake at US$2bn, which implies US$4.2 EV/ton for mine reserves (US$6.5/ton previously). We lower our SOTP-based target price to Rs1,346 (fromRs1,519) and downgrade to Hold (from Buy). The stock currently trades at 2.9x our FY11F book value.

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