Tata Power won't remain inexpensive for long. Here's why

More bad news fro Tata Power! Citi downgraded Tata Power to neutral and slashed its target price to Rs 102 from Rs 127.

The reason: Though Tata Power looks inexpensive now with the stock trading at 11.4 times its 2012 earnings, it will not look the same once the Mundra UMPP operations run for a full year in fiscal year 2014. The Mundra operations have not been commissioned this year and will not face all losses even in the next year. But once it faces the brunt of 4GW in FY14, the price will be 15.6 times its earnings and will naturally be expensive.

[caption id="attachment_138418" align="alignleft" width="380" caption="Citi downgraded Tata Power to neutral and slashed its target price to Rs 102 from Rs 127. Reuters"][/caption]

Coal prices have gone up from the time the company had planned its project and after funding 63 percent of the project, the lenders are not sure they can lend the remaining 12 percent required for the Mundra project as they are worried about cash flows. In order to support Mundra UMPP, the management has committed to restructuring, under which the company will transfer at least 75 percent of the ownership of investments in Indonesian coal companies to Mundra UMPP this year. The company will also evaluate other alternative options to support Mundra UMPP. As a result it might end up with an even more complex accounting structure for itself.

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The lower operating profits and high debt of the parent company has primarily led to the downgrade. And the Mundra project has suffered for higher coal prices, rupee cost due to the depreciation and higher cost of equity.