Jefferies turned cautious on Tata Power Co. Ltd. after the Gujarat government withdrew a 2018 order that allowed private power producers to charge higher tariffs for their imported coal-based projects.
The brokerage changed its rating on the stock to 'Underperform' from 'Hold' earlier, according to its note. An 'underperform' rating suggests that Jefferies expects the stock to fall up to 10% within the next 12 months.
Earlier today, the Gujarat government revoked its 2018 resolution to "safeguard the interest of the consumers", saying that the order was not fulfilling its objective. At that time, a government-constituted panel had noted that power producers were finding it hard to continue operations due to the rising cost of coal imports.
However, with the change in the situation of supply of coal and to ensure reasonable rates for consumers, the order has now been withdrawn.
Tata Power has a 4,000-megawatt plant in Mundra, in the Kutch district of Gujarat.
The order came after Tata Power, in March, had threatened to shut operations if states buying power from it didn't increase tariffs to compensate for costlier imported coal. Gujarat, Maharashtra, and Punjab had agreed to higher tariffs then.
Today's move slims the chances of a tariff hike at the Mundra plant in the near term, Jefferies said. Tata Power had the potential to hike tariffs at Mundra by 35-55 paise a unit but the state's decision now poses a hurdle for that.
Jefferies said the recent rally in the stock had priced-in this potential hike and other positive factors like debt reduction. However, no tariff hike at Mundra and the increasing cost of coal mining could be a downside.
Shares of Tata Power Company Ltd. closed 4.19% lower after the announcement compared with a 0.4% decline in the benchmark BSE Sensex.
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