Tata Power Co. Ltd.

4th Mar, 2010

OnRobustGrowthPath

Buy

CMP: Rs.1335 Target: Rs.1610

Sensex Nifty 17000 5088

StockData EquityCap Rs.221.4cr FaceValue Rs.10 MarketCap. Rs.31427cr Avg.Vol. 0.71lacs (2week) High Rs.1518.6 52wk Rs.602 Low EPS Rs.47.5 (St.Tr4Q) DPS Rs.11.6 P/E 28.1 P/B 3.41

Tata Power Co. Ltd is Indias leading private sector integrated power utility company with presence in power generation, transmission and distribution, power trading and coal mining. The company has major expansion plans over the next few years which would sustain the companys status as the major power sector player in the country. The diversified businessmodel provides the company value accretion from the various segments as well as provides it the capability to take advantageoftheincyclicalityinvarioussegments.

HIGHLIGHTS
Expansion Plans on Track: Tata Power has ambitious capacityexpansionplanstoraiseitsinstalledpowergeneration capacityfrom2791MWto8242MWbyFY13.Thecompanyhas an excellent track record in the timely execution of the power plants construction. The construction of the major plants viz., Mundra Ultra Mega Power Plant of 4000 MW capacity and MaithonPowerPlantof1050MWareprogressingaheadofthe schedule and are expected to contribute significantly to the overallpowergenerationofthecountry.ThecompanyinFY09 generated 14,807 MUs while the Mundra UMPP alone would generate 29,784 MUs per annum assuming aPLF of 85% while Maithon plant is expected to contribute 7818MUs of power (at 85%PLF),reflectingthehighgrowthpotentialofthecompany. Value Accretion from Coal Mining: Tata Power has 30% stake in the Indonesian coal mine KPC and Arutmin which during CY08 generated 53mn tones of coal at the average realization of $70 per tonne. The stake in the Indonesian coal minesprovidesasignificantcontributiontotherevenuegrowth of the company. The Indonesian coal mines have the target of raising the production level to 111mn tonnes by 2012 which would provide quantum jump to the revenue and profitability ofthecompany. Ensured Fuel Security: The timely fuel supply is a major concern for the efficiency of the power plants in the country. The company has not only secured fuel supply contracts until 2014 for the existing power plants, it has also ensured fuel supplyforitsupcomingpowerprojects.TheMundraUMPPhas beenensuredanannualsupplyof10.11mntonnesofcoalfrom the KPC and Arutmin coal mines in which it has 30% stake whichalsooffersthecompanypricingbenefit. Increasing Customer Base in Mumbai LA: The Supreme Court in its judgment in July08, upheld Tata Powers rights to supply power to retail consumers in Mumbai Licence Area, irrespective of consumption limits. The company is increasing itscustomerbaseafterthedecision.

ShareHoldingPattern(%) Promoter MFs/FIs/Banks FIIs BodiesCorporate Ins.Cos. Public Ason31stDec09

31.06% 7.63% 18.26% 0.72% 20.08%

22.25%

Analyst
MadhavBhardwaj 02222642634 madhav@matasec.com

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Tata Power Co. Ltd.

VALUATION
TataPowersdiversifiedbusinessmodelprovidesitthevalueaccretion fromitsvarioussegments.WehavevaluedthestockontheSOTPbasis and the fair value of the stock as per the valuation is Rs.1609.8. The prospectsofthestandalonebusinessremaintobeencouragingwiththe increasingcontributionfromtheincreasingcustomerbaseaswellasthe merchantpowercapacity.Themajorcontributorstothefairvalueofthe company are also its upcoming Mundra UMPP and Maithon Power plantaswellasitsstakeintheIndonesiancoalmines.Theinvestments made by the company in the telecom companies, i.e., Tata teleservices Ltd, Tata Communications Ltd and Tata Teleservices Maharashtra Ltd arealsomajorcontributorstotheembeddedvalueofthecompany. The SOTP valuation of the stock gives the fair value of the stock as Rs.1,610. S.N. Segment Stake 100% 100% 74% 74% 74% 30% 51% 51% 100% ValuationMethod DCF DCF DCF DCF DCF DCF 2*FY12BV 2*FY12BV 5*FY12EPS 30%DiscounttoValuation Rs/Share 632.8 205.1 50.7 11.0 10.6 350.5 23.9 55.6 34.9 234.7 1,609.8

1 TataPowerStandalone 2 MundraUMPP 3 4 5 6 7 MaithonThermalPlant IELJojobera IELJamshedpur CoalMiningJV Powerlinks

8 NDPL 9 TataPowerTradingCo. 10 TelecomInvestments Total

At the current market price of Rs.1,335 as on 3rd March10, the stock trades at a PE of 28.1x based on 4Q Trailing EPS of Rs.47.5. The stock is expected to achieve the target of Rs.1,610 over the next 1215 months. We initiate the coverage on the stock with the Buy recommendation.

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Tata Power Co. Ltd.

Emergencefromahydropower producertoadiversifiedplayer Executing5242mwpower generatingcapacities Trackrecordoftimelyproject execution

COMPANYPROFILE
TataPowerCo.Ltd.wasestablishedin1919afterthemergeroftheTata Hydroelectric Powersupply Co. and Andhra Valley Power Supply Co. Thecompanycommissioneditsfirstpowerplant,ahydroelectricpower plant in Khopoli of capacity 72MW in 1915. It established the second hydro station in Bhivpuri (75 MW) in 1919 and third one in Bhira (300 MW)in1922.In1960,thecompanysetupits1,350MWthermalpower plantinTrombayfollowedbya475MWpowerplantnearJamshedpur in Jharkhand and 87 MW thermal power plant in Belgaum. The companylaterenteredthetransmissionanddistributionbusinessinthe Mumbai.Thecompanyisnowpresentinallthesegmentsofthepower sectorviz.,generation,distribution,transmissionandpowertrading. Thecompanyhasmajorexpansionplansintermsofthenewcapacities aggregating 5,451MW as of now, which are expected to be commissionedbytheendofFY13.Thecompanyhasthetrackrecordof achieving the timely execution of the power projects which provides highvisibilityforachievinghighpowergenerationvolumegrowthover thenextfewyears. Thecompanyhasalsoacquired30%stakeintheIndonesiancoalmines which would not only ensures the fuel supply for the companys upcomingMundraUMPPbutalsoprovidestherevenueupsideforthe companywiththehighgrowthexpectedinthecoalproductionfromthe coal mines over the next few years as well as the upside in the selling priceofthecoalintheinternationalmarkets.

SHAREHOLDINGPATTERN(Ason31stDec09):
The shareholding pattern of the company is diversified with the promotersholding31%ofthecapital. TheFIIinvestmentinthecompanyhasremainedhighat18.26%which reflectstheconfidenceoftheoverseasinvestorsinthegrowthpotential ofthecompany.

BodiesCorporate 0.72% Individuals22.25% Promoters31.06%

FIIs18.26% Banks,FIs0.32% InsuranceCos. 20.08%

MFs7.31%

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Tata Power Co. Ltd.

CORPORATESTRUCTURE:
TataPower

Subsidiaries

JVsandAssociates
30%

Investments

100%

CoastalGujarat PowerLtd

KPC

30%

TTML

30% 100%

Arutmin
30%

TataPowerTrading Co.Ltd
30%

TTSL

Indocoal
30%

100%

Trust Energy Resources Pvt. Ltd.

33%

Panatone

Mandakini CoalMine Ltd.

30%

74%

MaithonPowerLtd
40%

TataComm.

TubedCoal MineLtd.

74%

IndustrialEnergy Ltd.
49%

TataBPSolar Ltd.

51%

NorthDelhiPower Ltd
26%

Dagachhu

51%

Powerlinks Transmission Ltd. NelcoLtd.

5%

Exergen

50%

10%

Geodynamics

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Tata Power Co. Ltd.

DiversifiedBusinessModel

BUSINESSPROFILE:
TheBusinessprofileofthecompanyisdiversifiedwiththepresencein variousverticals. I. II. III. IV. V. Generation TransmissionandDistribution PowerTrading CoalMiningJV OtherBusiness

Tata Power

Generation

T&D

Trading

CoalMiningJV

Others

SED Standalone JVs (IEL) Standalone MumbaiLA NDPL Jamshedpur PowerPlant Jojobera PowerPlant Powerlinks Subsidiaries

Tata BP Solar

MumbaiLA

Wind PowerPlants Hydro Power Plants

Belgaum PowerPlant

Jojobera PowerPlant

Haldia PowerPlant

Trombay Thermal Plants

Generation
14717 14807

I.Generation:
15000 14500 14000 MUs 13500 13000 12500 12000 11500 FY05 FY06 FY07 FY08 FY09
12663 13616

14269

The power generation growth of the company has registered a growth of about 4% CAGR over the past four years. The slow pace of the growth has been on account of the stable generation from the Trombayplantswherethecapacityremainedstable over the past few years. However, with the significantcapacityadditionoverthenextfewyears,the generationisexpectedtorisesubstantially.

CapacityMix: Tata Powers generation capacity is predominantly thermal. The generationduringFY09wasmainlycontributedbytheTrombayplants (67%).

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Tata Power Co. Ltd.

CapacityMix W ind Hydro 15% 7%

ElectricityGeneration(FY09) Belgaum, Jamshedur 21% 3% Wind,1%

Thermal 78%

Hydro,8%

Mumbai License Area,67%

Thegenerationbusinessofthecompanycanbebifurcatedinto: (A)GenerationUnderStandaloneBusiness MumbaiLicenseArea TrombayThermalPowerPlants(1480MW) HydroPowerPlants(447MW) WindPowerPlants(144MW) BelgaumPowerPlant(81MW) JojoberaCaptivePowerPlant(428MW) HaldiaMerchantPowerPlant(120MW) (B)GenerationUnderSubsidiariesandJVs: IEL: JamshedpurCaptivePowerPlant120MW JojoberaCaptivePowerPlant(120MW)

(A)GenerationUnderStandaloneBusiness:
MumbaiLicenseArea
Mumbai License Area has total capacity of 1927MW (1480MW of Trombaythermalplantsand447MWhydroplants).
Units Capacity (MW) Fuel Type

Unit4 Unit5 Unit6 Unit7 Unit8

150 500 500 180 150

Oil&Gas Oil,Coal&Gas Oil&Gas Gas Coal

Total

1480

The company has the PPAs with BEST for 800 MW of capacity and 477 MW is sold through Tata PowerDistribution, Unit 8 of Trombayplantswhichhasbeenrecentlycommissionedwouldbe merchantpowerbasedplant.TPLsells500MWtoRelianceInfra whichshouldlastbyMar10.Postthisperiod,TataPowerwould sellthis200MWoutof500MWdirectlytoconsumersthroughits distribution arm in the Mumbai LA, 200MW to Tata Power TradingCo.Ltd.and100MWtoBEST.Manyofthecustomersof RelianceInfraareshiftingtoTataPowerasthelatterispermitted to add more consumers in Reliance distribution area. The performanceofTrombaythermalplantshasbeenstableoverthe past few years and the PLF has been near 85%, which is consideredassatisfactory.

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Tata Power Co. Ltd.

PerformanceofThermalPlantsTrombay PAF 10200 10000 9800
MUs

Generation 10002 9845 100% 80% 9180 60% 40% 20% 0% FY07 FY08 FY09

PLF 93% 79% 95% 86% 91% 84%

9600 9400 9200 9000 8800 8600

FY07

FY08

FY09

HydroPowerPlants447MW): Thecompanyhasthreehydroelectricpowergeneratingstations with aggregate capacity of 447MW, situated in the Raigad districtofMaharashtra,Khopoli(72MW),Bhivpuri(75MW)and Bhira(300MW).Thehydelpowerplantsareamongsttheoldest inthecountry. The Krishna Water Dispute Tribunal Award determines the amountofwaterthatisavailableforpowergeneration.So,even though the plant availability is high, the PLF of the plant has beenlow.
Ge ne rationHydroPowe rPlants 2500 2000

PerformanceofHydroPowerPlants PAF PLF 98% 99% 95%

2138 1489 1151

100% 80% 60% 60% 38% 29%

MUs

1500 1000

40%
500 0

20% 0% FY07 FY08 FY09 FY07 FY08 FY09

WindPowerPlants:
The company has a total installed capacity of 193MW in the wind power segment. During FY09, the company added 80.6MW of capacityincluding36MWatGadag(Karnataka),29.6MWatSamana (Gujarat) and 15 MW at Sadawaghapur (Maharashtra). Out of the totalcapacity99MWislocatedinMaharashtra,50MWinGujaratand 44MWinKarnataka. Thepowergeneratedwas177MUsinFY09bythesewindfarmsas against 127 MUs during FY08. The wind power plants usually operate at the PLF of about 20%. The major customers of the wind power are BESCOM in Karnataka and GUVNL (Gujarat Urja Vikas Nigam Ltd.) in Gujarat. In Maharashtra, the company sells power from wind power plants through PPA with Tata Power Co. Distribution.

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Tata Power Co. Ltd.

BelgaumThermalPowerPlant:
Belgaum(Karnataka)thermalpowerplantofthecompanyhasatotal installedcapacity of 81MW. The plant runson heavy fuel oil. The major customer of the power from the plant is Karnataka Power Transmission Corporation Ltd. (KPTCL) which buys power under PPA valid till 2012. The PLF of the plant improved significantly to 63%duringFY09ascomparedto33%inFY08.

JojoberaThermalPowerPlant:
The power plant in Jojobera, Jharkhand, has a capacity of 428 MW throughfourcoalfiredunits.Theplantsrunondomesticcoal.The plant operates for the captive use by Tata Steel. During FY09, the plantoperatedataPLFof80%ascomparedtoaPLFof76%during FY08.

HaldiaMerchantPowerPlant:
Haldia plant has a total capacity of 120 MW. The plant has PPA withTataPowerTradingCo.Ltd.Thefuelfortheplantisthehotflue gasesfromHooglyMetcoke.

(B)GenerationOutsideStandaloneBusiness:
The company has entered into a 74:26 JV with Industrial energy Ltd. (IEL)forsettingupoftwocaptivepowerplants.

JamshedpurPowerHouse6:
A 120 MW capacity power plant is being constructed at Tata Steel Works, Jamshedpur for captive use of Tata Steel and the coke oven gases of Tata Steel as fuel. The total cost of the project is Rs.490cr. The plant would utilize waste blast furnace and it has been commissionedinMay09.

JojoberaUnit5:
TataPowerisalsosettingupa120MWpowerplantatJojoberaata totalcostofRs.620cr.Theplantwouldhavethecoallinkageswiththe WestBokaroandMahanadiCoalfields.Theplantisexpectedtobe commissionedinQ4FY10.

II.TransmissionandDistribution:
(A) T&DUnderStandaloneBusiness: T&DUnderMumbaiLicenseArea

(B) T&DOutsideStandaloneBusiness:
NorthDelhiPowerLtd PowerlinksTransmissionLtd

(A) T&DUnderStandaloneBusinessMumbaiLicenseArea
The Company supplies power directly to bulk consumers such as Central and Western Railways, Mumbai Port, refineries, textile mills,

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Tata Power Co. Ltd.

fertilizerfactories,BARC,MunicipalCorporationwaterpumpingplants and other major continuous processes industries requiring Major T&D service provider in uninterrupted power supply. The latest addition to the list is the MumbaiLicensearea commercialdistrictattheBandraKurlaComplexandmajorcommercial andresidentialcomplexesinthesuburbs. Tata Power had 25,400 customers with 2,468 MUs of electricity sold in MumbaiLAduringFY09.Ithas17receivinganddistributionstations, 318consumersubstationsand1335kmsofHTandLTcablenetworkin theMumbaiLicensearea.Thecompanyhasaround1,100ckmofpower cablenetworkcomprisingof973ckmof220kV/110kVoverheadlines and124ckmof220kV/110kVundergroundcables. SCordertobenefitTataPower Earlier, Tata Power was not allowed to add customers in the Mumbai License Area. The Supreme Court in its judgment in July08, upheld Tata Powers rights to supply power to retail consumers in Mumbai LicenceArea,irrespectiveoftheirconsumptionlimits. The company is increasing its customer base significantly after this decisionandplanstodeveloptheinfrastructurefortheretailsupply.As forthetransmissionbusiness,thecompanyplansnewtransmissionlines for increasing the load capacity and to add 1000 MVA transformer capacityandupgradethesystemto400kV.

(B)T&DOutsideStandaloneBusiness:
NewDelhiPowerLtd.: NDPLbecameasubsidiaryofthecompanyfromJan08.NDPL registered a revenue of Rs.2,479cr for FY09 as against Rs.2,278crforFY08, aYoYgrowth of 8.8%. TheAT&Closses have been reduced from about 23.7% as at the end FY07 to 10.5%forFY09.Thesubsidiaryhasover1mncustomerswitha totalofover5,000MUsofpowerconsumption. PowerlinksTransmissionLtd. TheJVwithPowerGridCorporationofIndiaLtd.isoperating and maintaining the 1200kms and 400 kV double circuit transmissionlinesfromTalaHydroelectricProjectinBhutanto New Delhi. The subsidiary earned revenue of Rs.279cr for FY09asagainstRs.245crforFY08.

III.PowerTradingTataPowerTradingCo.Ltd.
Tata Power Trading Co. Ltd traded about 3,000 MUs during FY09 as compared to 1,711 MUs in the previous year. The revenue earned registered a growth of 145.3% for FY09 to Rs.2,167cr as compared to Rs.883.5crthepreviousyear.

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Tata Power Co. Ltd.

IV.CoalMiningStake:
Tata Power has taken significant interest in owning the coal assets in ordertoensurethefuelsuppliesforitspowerbusiness.Thecoalmining businessofthecompanymaybeclassifiedinto: StakeinCoalBlocksinIndia MandakiniCoalCo.Ltd. TubedCoalBlocks StakeinIndonesianCoalMines KPC Arutmin

CaptiveCoalBlocksinIndia:
MandakiniCoalCo.Ltd.:Mandakinicoalblock,locatedintheAngul district of Orissa, has been allocated to a JV of the company along with Monnet Ispat & Energy Ltd. and Jindal Photo Ltd. The companysshareis33%.Theblockisestimatedtohavethereserves of 291mn tonnes and 7.5 MTPA may be mined from the block (Tata Powersshare2.5MTPA).Thecompanysshareoftheminedcoalis estimated to provide sufficient fuel for a 1,000 MW thermal power plant. The coal production from the block is expected to start by FY12. TubedCoalBlocks:Thecompanyalsohasa40%stakeinitsJVwith HindalcoandTubedCoalMinesLtdfortheTubedCoalBlocks.The block islocated inLatehar,Jharkhandand has estimated reservesof 120mntonnes.5.75milliontonesisestimatedtobemineableperyear fromtheblock;outofwhich,TataPowerwouldhavetheshareof2.3 MTPA(40%).Thecoalproductionfromtheblockisexpectedtostart byFY13.

StakeinIndonesianCoalMines:
Tata Poweracquired30% stake in the KPC and Arutmin coal minesin 2007. Theproductionduring Jan09 to June09was27mn tonneswhile theaveragesellingpricewas$66pertonne.Themineshavethetarget toraisethecoalproductionupto111mntonnesby2012. TataPowerhas30%stakeinBumiResourcesofIndonesia.Bumiscoal miningoperationsareconductedbyitstwominingsubsidiaries,Kaltim Prima Coal (KPC) and Arutmin located in East and South Kalitman, Indonesia.ThekeymarketsfortheminesarewholeofAsia,Europeand SouthAmerica. KPCandArutmintogethercommandedover28%ofthemarketshareof the Indonesian coal production in 2007 and together constituted the second largest coal exporter globally. KPC exported about 87% while Arutminshipped92%ofitscoalproduction.

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Tata Power Co. Ltd.

SuperiorCoalQuality:
The mineable coal at the KPC and Arutmin coal mines is of high quality as reflected by the high calorific value of the coal as well as the low sulphur content and low moisture. The high quality of the coalisexpectedtoresultinthesustainabledemandforthecoalofthe minesaswellasthehighrealizationforthecoal. Operating CalorificValue Total Total Ash Mines (KCal/kg) Sulphur(%) Moisture(%) (%) Sangatta Prima 7,100 0.70% 10.50% 4.00% Pinanag 6,290 0.50% 17.00% 3.50% KPC Melawan 5,690 0.30% 23.00% 2.50% Bengalon 6,230 0.90% 14.00% 4.50% Senakin 6,700 0.80% 11.00% 12.00% Arutmin Satul 6,800 0.80% 10.00% 8.00% MuliaAsamasam 5,000 0.20% 35.00% 3.90% Batullicin 6,600 1.40% 9.00% 12.00% Source:KPCandArutmin

SignificantCoalReserves:
KPCandArutmincoalmineshavecoalreservesandresourcesof9.49 billion tonnes which are sufficient to provide revenue visibility for many more years to come. The slow growth in production during 2009 was on account of unusually heavy rains and equipment delivery delays which created major bottlenecks. Thedecline in the realizationisonaccountofthedeclineinthefuelpricesattheglobal level in view of the ongoing economic constraints. However, given thesuperiorqualityofthecoal,thedemandforthecoalinthemines of KPC and Arutmin would improve with the recovery in the economicactivityaswelltherealizations. Inmilliontonnes KPC Sangatta Melawan NorthPinang Begalon Total(KPC) Arutmin Senakin Satui Batulicin SubBituminous Total(Arutmin) 43 84 25 407 559 CoalReserves 160 337 920 146 1,563 411 269 216 2,047 2,943 CoalResources 3,447 977 4,424 454 353 241 2,454 3,502 Total 3,607 337 920 1,123 5,987

Source:KPCandArutmin

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Tata Power Co. Ltd.

BalancedContractComposition:
Bumi Resources balances the fluctuations in the spot market prices withenteringintothecontractsformediumandlongtermcontracts. Accordingly, the company is currently using 20:80 breakdown between the spot and time contracts. The long term contracts have enabled the company to avoid a major drastic decline in the contractedpricesforthecoal.

V.OtherBusinesses:
StrategicElectronicsDivision:
SED is emerging as the Prime Contractor and Large Systems Integrator in areas such as Launchers, Electronic Warfare, Battlefield Management System, Tactical Communication System, etc. In Mar09, the SED received the order of Rs.182.46cr to manufacture16WheeledLaunchersfortheAkashWeaponSystem tobedeliveredtotheIndianAirForceinthesubsequent33months.

TataBPSolar:
Tata BPSolar isa51:49 JVbetween BPSolarand TataPower.The JV is a market leader in photovoltaic technology in India with a totalturnoverofRs.1,147crforFY09.About75%ofthetotalsales oftheJVisfromtheexportstoEuropeandUSA.TheJVhasaplant withthesolarcellmanufacturingfacilitywiththeinstalledcapacity of 46 MW and module manufacturing facility with the installed capacityof88MWasonMar09.

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Tata Power Co. Ltd.

MajorExpansionplans

TPLSGROWTHPLANS
PowerGenerationCapacityExpansion
The company is implementing 5451MW capacity expansion plan whichisexpectedtobecompletedbytheendofFY13. MaithonJointVentureProjecttoDriveGrowth: Thecompanyissettingupa1,050MW(2*525MW)JVprojectin Maithon (Jharkhand) in a 74:26 JV with Damodar Valley Corporation.TheprojectinvolvesanestimatedcostofRs.4,450cr beingfundedinthedebtequityratioof70:30. PPAshavebeensignedandpowerevacuationarrangementisset inplace.ThemajorbuyersofpowerfromtheplantareDVC(300 MW), NDPL (300 MW), WBSEB (150 MW) and PSEB (300 MW). Over72%oftheworkhasbeencompleted. ThefirstunitisscheduledtocommenceoperationsbyOct10and second unit by Apr11. The total coal requirement for the plant would be 5mn tons per annum which would be procured throughthecoallinkageswithCoalIndiamines.Theeffortsare ontosignthefuelsaleagreementsfortheplant. MundraUMPPonFastTrack: TPL is setting up 4000mw UMPP (5 x 800mw) at a total cost of Rs.17000cr, through its 100% subsidiary Coastal Gujarat Power Ltd.Theprojectisexpectedtobecompletedby2012asagainst 2014 as per the bid conditions. Overall, 42% of the project has beencompletedandisprogressingwell. The timely execution of the project would result in significant upside in the units generated by the company. At the assumed PLFof85%,theplantwouldgenerateabout29,784MUswhichis almosttwiceofthecurrentgenerationof14,807MUsforFY09. TheprojecthasbeenawardedtoTataPoweratthelevelizedtariff ofRs.2.26perunitoverthe25yearperiod.Theplantwillusethe coalfromtheIndonesiancoalmines. Tata Power has the coal offtake agreement of 10.11mtpa (+ or 20% at TataPowers Option) with KPC coal mines in Indonesia. About45%ofthecoaltobeprocuredwouldbeonafixedF.O.B. price of $36 per tonne while the remaining would be supplied basedontheprevailingcoalpricesininternationalmarkets. The major customers of the electricity from the plant would be Gujarat (1,805 MW), Maharashtra ((760 MW), Punjab (475 MW), Haryana(380MW)andRajasthan(380MW).

1050mwcapacityatacostof Rs.4450cr PPAinplace TobecompletedbyApr11 CoallinkageswithCIL

4000mwatanoutlayofRs.17000cr Implementationprogressingwell LevelisedtariffofRs.2.26perunit CoalfromIndonesianmines

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Tata Power Co. Ltd.

CoalBusinessGrowth
BumiResourcesplanstoextendtheproductioncapabilityto111mn tonnes by 2012, which is expected to result in significant growth in the revenues of the company, even considering the rates of coal to remainstableinthefuture.

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Tata Power Co. Ltd.

MajorExpansionplans

INVESTMENTRATIONALE
PowerCapacityExpansionProgrammesonFullSwing:
The company has the installed capacity of 2,791MW which is expected to rise to 8,242MW by FY13. As against the power generationcapacityadditionattheCAGRofmerely4%overthepast fouryears, the expansionisexpectedtoriseataCAGR of 31%over the next four years. Out of the total planned capacity expansion (5,451mw), Mundra UMPP forms about three fourths of the incrementalcapacity.
CompositionofCapacityExpansion Wind 1% Jojobera 2%

GenerationCapacityAddition

10000 8000 MW 6000 4000 2000 0 FY08 FY09 FY10E FY11E FY12E 2365 2791 3104 4242 5842

8242

Maithon 20%

Mundra

FY13E

76%

SCOrdertoImproveCustomerBaseinMumbaiLA:
SubsequentupontheSupremeCourtorderinJuly08,thecompanyis increasing its customer base in Mumbai License Area. After the order,thecompanyisincreasingitscustomerbase.InQ3FY10,over 6,200 customers shifted over to Tata Power and over 14,700 changeoverapplicationshavebeenreceived.DuringAprDec.09,the total number of applications received number stands at 16,817. The positiveresponseofthecustomersinMumbaiLAensurestheleading positionofthecompanyastheserviceproviderintheLicenseArea.

CoalAssetstobeGrowthDrivers
EnsuringFuelforFuturePowerCapacitiesThecompanyplans tosetupIPPsforutilizingthecaptivecoalblocks.Thecompanys share of the coal in domestic coal mines is estimated to provide sufficientfuelfora1,500MWthermalpowerplant.Thecaptive coalblocksnotonlyprovidefuelsecuritytothecompanyforits existingplantsbutalsoenableittoestablishnewthermalplants infuture. CoalSalefromIndonesianCoalMinestoSustainGrowthThe Indonesian coal mines are expected to increase the coal production significantly over the next few years. These are expected to produce 111mn tonnes of coal by 2012 as against 53mn tonnes in 2008. Even assuming a conservative coal price levelof$65pertonne,theproductiongrowthto90mntonnesper annum by FY12, the coal mining segment would contribute significantlytothegrowthofthecompanyinfuture.

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Tata Power Co. Ltd.

CoalPrice($/tonne) ExchangeRate(Rs./$) Production(mntonnes) TotalRevenue(Rs.Cr.) TataPowersShare(30%) FY09 65 48 60 18,720 5,616 FY10 65 48 70 21,840 6,552 FY11 65 48 80 24,960 7,488 FY12 65 48 90 28,080 8,424

Coal From Indonesian Mines Providing Fuel Security As discussedearlier,theUltraMegaPowerPlantofthecompanyat Mundra would receive imported coal from the coal mines KPC and Arutmin in Indonesia in which it has 30% stake. The companywouldnotonlyhaveanensuredfuelsupplybutwould alsohavethepricingadvantage.

TelecomInvestmentsProvidingUpside:
The telecom investments by Tata Power also provide it the value accretion. DOCOMO had acquired 26% stake in Tata Teleservices Ltd for Rs.12,770cr, hence valuing the company at Rs.49,115cr. Tata Teleservices (Maharashtra) Ltd and Tata Communications Ltd have beenvaluedatthemarketcap.
Tata TeleservicesLtd 49115 11.20% 5500.9 22.1 248.9 30% 174.2 TataTeleservices (Maharashtra)Ltd 4410 11.50% 507.2 22.1 22.9 30% 16.1 Tata Communications 8149 17.20% 1401.6 22.1 63.4 30% 44.4

MarketCap/Valuation(RsCr) TataPowersShareholding TataPowersAttributableValue No.ofTataPowersShares Valuepershare Discount ValuepershareforSOTP

Total 234.7

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Tata Power Co. Ltd.

INDUSTRYOUTLOOK
LeadingAmongPrivatePlayers:
TataPoweralreadyhasaninstalledcapacityof2791MWasagainstthe otheremergingprivatesectoroperatorwhicharehavingmajorcapacity expansionplansbutverylowexistingcapacity.
CapacityExpansionPlansofPr ivatePlay er s 10000 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 TataPow er Reliance Pow er Installed UnderConstr uction

M W

Adani Pow er

Ster lite Ener gy

JSW Ener gy

PerformanceofthePowerSectorinRecentYears:
The performance of the power sector in the recent years has been less than satisfactory and the country has fallen short of the targeted generationaswellascapacityaddition.
ElectricityGenerated 800000 600000
586412 587366 621500 617382 658950 659419 710000 704451 774344

CapacityAddition
723556

20000 15000

16418.8

16335.2

11061.2 9263 6934.52 5245.52 3948.92 3468.8 6853 3453.7

M Us

400000 200000 0 FY05 FY06

Target

MW
FY07
Achievement

10000 5000

FY08

FY09

FY05

FY06
Target

FY07
Achievement

FY08

FY09

Source:CEA

StrongDemandtoContinue:
The capacity addition at a robust pace is imperative to sustain the growthofthenation.Theprimaryreasonsfortheshortfallswitnessed in previous plan periods are delays in acquiring sites and obtaining approvals, equipment shortages and the inability to achieve financial closure. According to Report of the Expert Committee on Integrated Energy Policy issued by the Planning Commission the energy requirement considering 8% GDP growth over the next 24 years is as under:
Inastalled Capacity Requirement 800 700 600 G W 500 400 300 200 100 0 200708 201112 201617 202122 202627 203132
220 143 306 425 575 778

EnergyRequirement 4000 3500 B n U its illio n 3000 2500 2000 1500 1000 500 0 200708 201112 201617 202122 202627 737 1097 1524 2118 2886

3880

203132

Source:IntegratedEnergyPolicy,PlanningCommission

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Tata Power Co. Ltd.

Generation
14717 14807

FINANCIALANALYSIS(Standalone):
HighRevenueGrowth:
15000 14500 14000 M Us 13500 13000 12500 12000 11500 FY05 FY06 FY07 FY08 FY09
12663 13616 14269

Total income of the company grew at the CAGR of 16.2% over the past fouryearstoRs.7,869crinFY09onaccountofthehighgrowthinthefuel prices (26.8% CAGR) over the same period. The fuel cost which constitutesabout80%ofthetotalcostincaseofpowersectorcompanies, isapassthroughcostwhichisreflectedinthehigherrealizations. The unitsgeneratedoverthepastfouryears haveregistereda CAGR of only4%onaccountofthelowcapacityaddition.

7869 5000 6414 4500 4000 Rs.Cr. 3500 3000 2500 2000 1864 2397 2709 3715 FuelCost 4813

TotalIncome 8000 7500 7000 Rs.Cr. 6500 6000 5500 5000 4500 4000 FY05 FY06 FY07 FY08 4318 4860 5059

FY09

1500 FY05 FY06 FY07 FY08 FY09

StableProfitMargins:
OperatingprofitofthecompanyhasgrownattheCAGRof7.9%overthe pastfouryearsandPATby13.7%overthesameperiod.Sincethecost of production is passable to the customers, the profitability margins are moreorlessstableintherangeof2224%.Asperthepowertariffpolicies inthecountry,thereturnontheequityisassured.
GrowthinProfits 2000 1434 1500 Rs.Cr. 1310 1191 1067 1000 551 500 611 870 697 922 1773 35% 30% 25% 20% 15% 10% 5% 0 FY05 FY06 FY07 FY08 FY09 0% FY05 FY06 FY07 FY08 FY09 12.8% 12.6% 13.8% 13.6% 11.7% 30.3% 24.5% StableProfitMargins OPM 21.1% PATMargin 22.4% 22.5%

20% 15% 10% 5% 0% FY06 FY07 FY08

CashFlowsStable:
CashAccrualsStable

Thecashaccrualsofthecompanyhaveremained stable over the last four years. The company has maintained low cash balances over the past two year as it increased its investments significantly overthepasttwoyears.
FY09

(CashFlow+interest)/Av.totalassets

NetCashAccrual/TotalIncome

However, the cash accruals over the past two years have been sufficient to sustain the expansionplans.

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Tata Power Co. Ltd.

10000 8000 R .C s r. 6000 4000 2000 0 FY'06 FY'07 FY'08 FY'09

0.50 0.42 0.60

HighCreditQuality:
0.63

0.70 0.60 0.50 0.40 0.30 0.20 0.10 0.00

(x )

The company has maintained its overall gearing ratioatthelowlevelsdespitethecapitalintensive natureandthedebt:equityfundinginratio70:30. The low gearing ratio provides the company sufficientleveragecapacity.

GrossBlock

GearingRatio

FinancialPerformance(9mFY10):
Total income of the company has declined by 9.1% for the 9mFY10 on account of the sharp decline in the fuel cost by 20.6%whichisapassthroughcostforthecompany. The drastic fall in the fuel cost has led to the operating profit risingby43.1%fortheperiod. The cost of power purchased has also decline as the company purchasedsignificantlylowernumberofunitsduring9mFY09.

Rs.Cr.

Particulars UnitsGenerated(MUs) TotalInc. FuelCost CostofPowerPurchased EmployeeCost OtherExp. TotalExpenditure PBDIT Depreciation Interest PBT Tax PAT

9mFY10 9mFY09 Growth 12157 5531.9 3124.6 106.0 241.6 418.2 3890.4 1641.5 351.0 311.7 978.8 270.6 708.2 11241 6083.5 3935.2 445.5 215.6 339.8 4936.2 1147.3 230.3 215.4 701.7 134.0 567.7 8.1% 9.1% 20.6% 76.2% 12.1% 23.1% 21.2% 43.1% 52.4% 44.7% 39.5% 102.0% 24.8%

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Tata Power Co. Ltd.

FINANCIALPROJECTIONS(Standalone):
Consistent Growth to Sustain: Total income of the company is
expectedtoregisteradeclineforFY10onaccountofthedeclineinthefuel cost for the year. Subsequently, total income is expected to rise on accountoftheexpectedriseinthefuelcost,expectedimprovementinthe unitsproducedfromJojoberaandBelgaumplantsaswellastheincreased contributionfromtheHaldiamerchantpowerplant. TotalincomeofthecompanyisexpectedtorisetoRs.8679crforFY12. Theoperatingprofitisexpectedtoregisteragrowthof14.4%toRs.2658cr andPATtoRs.1425crattheCAGRof15.6%byFY12.
TotalIncome
GrowthinProfits

3000
Rs.Cr.
7851 8679
1773

2658
1425

2074
922 1031

2390
1248

10000
RsCr

7869

7034

2000 1000 0
FY09 FY10E
PBDIT

5000

FY11E
PAT

FY12E

0 FY09
33.0%

FY10E

FY11E

FY12E

OPM PATMargin 29.5% 30.4% 30.6% 28.0%

Profit Margins to Remain Stable: The

operating profit and PAT margins are expected to remainstableoverthenextfewyearsonaccountof the fuel cost which constitutes about 80% of the totalcostbeingapassthroughcost. Secondly the tariff fixing accounts for increase in interestcostaswellasdepreciation,whichprotects thebottomlineofthepowerproducers.

23.0% 22.5% 18.0% 15.6%

13.0% 11.7% 8.0% FY09

14.6%

15.0%

FY10E

FY11E

FY12E

Gearing Ratio to Remain in Control: The gearing ratio of the

company is expected to remain low on account of high internal accrual andlowcapexinthecompany(onstandalonebasis).
11.8% 11.6% 11.4% 11.2% 11.0% 10.8% 10.6% 10.4% 10.2% 10.0% FY09 FY10 FY11 FY12 10.4% 10.3% 11.0% 10.5% Rs.C r. 10.8% 10.9% 11.5% ROCE RONW 11.5% 12000 10000 8000 6000 0.30 4000 2000 0 FY09 FY10E FY11E FY12E 0.20 0.10 0.00 GrossBlock GearingRatio 0.70 0.60 0.50 (x) 0.40

Return Ratios to Improve: ROCE of the company is expected to

improve significantly over the next few years on account of the high growthexpectedinPAT(withmerchantpowerplantcomingonstream) aswellasthelowerpaceofgrowthingrossblockasthecompanyisonly goingtoincurmaintenancecapexonthestandalonebasis.

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Tata Power Co. Ltd.

Valuation:
TataPowerisontherobustgrowthpathonaccountof: High capacity expansion of 5451MW leading to the total installed capacityof8242MWbyFY13asagainst2791MWnow.Themajor contributorstothegrowthwouldbetheMundraUMPP(4000MW) andMaithonPowerPlant(1050MW). TherobustgrowthexpectedintheIndonesiancoalminesinwhich ithas30%stake.Theproductionisexpectedtoriseto111mntonnes by2012asagainst53mntonnesfor2008. Thetelecominvestmentsbythecompanyalsoprovideitthevalue accretion.

The SOTP valuation of the stock gives the fair value of the stock as Rs.1,610.Thedetailsaregivenintableonpage2ofthisreport. AtthecurrentmarketpriceofRs.1,335ason3rdMarch10,thestocktrades ataPEof28.1xbasedon4QTrailingEPSofRs.47.5.Thestockisexpected toachievethetargetofRs.1,610overthenext1215months. WeinitiatethecoverageonthestockwiththeBuyrecommendation.

PEERGROUPCOMPARISON:
TataPower 7868.58 22.32% 22.54% 11.72% 11.54% 10.99% 41.65 NTPC 44313.8 14.52% 24.20% 18.26% 12.59% 14.14% 9.81 NLC 3545.9 0.68% 26% 23.15% 8.10% 8.93% 4.89 ReliancePower 360.38 171.90% 74.12% 51.72% 1.83% 1.36% 0.78

Revenues(Rscr) YOYgrowth(%) OPM(%) PATMargin(%) ROCE RONW EPS(Rs)

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Tata Power Co. Ltd.

FINANCIALPERFORMANCE Profit&LossAccountRs.Cr.BalanceSheetRs.Cr.
Particulars NetSales OtherIncome TotalIncome CostofSales PBDILT Depreciation PBILT Interest Op.Profitbfr.Tax Extraord.Items PBT Tax PAT FY06 4532.2 327.5 4859.8 3668.7 1191.1 278.3 912.7 165.3 747.4 0.0 747.4 136.9 610.5 FY07 4715.3 344.0 5059.3 3991.9 1067.4 291.9 775.5 189.5 586.0 0.0 586.0 110.8 696.8 FY08 5915.9 497.9 6413.8 4979.3 1434.5 290.5 1144.0 173.9 970.1 0.0 970.1 100.2 869.9 FY09 7236.2 632.4 7868.6 6095.3 1773.3 328.9 1444.4 327.8 1116.7 0.0 1116.7 194.5 922.2 Particulars Assets F.Assets Invest NCA C.A. CurLiab. TotalCap. Liabilities ShareCap Reserves MiscExp.Notw/o NetWorth TermLiab TotalCap. FY06 3214.8 3412.2 1668.2 2973.0 1304.9 8295.2 197.9 5357.7 15.5 5540.2 2755.0 8295.2 FY07 3811.4 3570.2 2278.8 4042.3 1763.5 9660.3 197.9 5835.2 6.2 6026.9 3633.4 9660.3 FY08 4687.2 4430.0 2017.3 3875.5 1858.3 11134.5 220.7 7878.2 1.7 8097.2 3037.3 11134.5 FY09 5951.7 5443.5 2495.4 4681.1 2185.8 13890.6 221.4 8470.9 0.0 8692.4 5198.2 13890.6

KeyRatiosCashFlowStatement
Particulars Gr Tot Inc. Gr PAT PBDIT Mar PAT Mar ROCE RONW Gearing (x) Ov. Gearing (x) Current Ratio (x) Int. Cov. (x) Drs. Turnover Sales Per Sh. EPS (Rs.) Csh EPS (Rs.) DPS (Rs.) BV (Rs.) FY'06 12.6% 10.7% 24.5% 12.6% 11.2% 11.5% 0.50 0.50 2.28 5.52 5.54 245.54 25.84 43.52 8.51 279.92 FY'07 4.1% 14.1% 21.1% 13.8% 8.6% 12.0% 0.60 0.60 2.29 4.09 3.99 255.62 29.49 51.06 9.51 304.51 FY'08 26.8% 24.8% 22.4% 13.6% 11.0% 12.3% 0.38 0.42 2.09 6.58 4.44 290.58 36.82 53.17 10.94 366.85 FY'09 22.7% 6.0% 22.5% 11.7% 11.5% 11.0% 0.60 0.63 2.14 4.41 5.24 355.34 39.03 60.81 11.56 392.54 Particulars PAT Depreciation Misc Exo w/o Change in WC Op. Cash Flow Chg. In GB Chg. In WIP Chg. In Inv. Csh Flw Inv. Act. Pay. of Div. Chg. in Term Liab Chg. in Share Cap. Chg in Share Prem. Csh Fl fr. Fin. Act Op Cash Balance Cl. Cash Balance FY'06 610.5 278.3 0.0 -432.5 456.4 -458.9 225.8 90.8 -142.3 191.9 -105.0 0.0 0.0 -296.9 979.6 990.6 FY'07 696.8 291.9 0.0 -233.4 755.3 -305.0 -569.2 -158.0 -1032.2 220.2 878.4 0.0 0.0 658.2 990.55 1367.7 FY'08 869.9 290.5 0.0 -1077.5 82.9 -252.5 -900.7 -859.9 -2013.1 282.4 -596.1 22.8 1376.0 520.3 1367.72 28.7 FY'09 922.2 328.9 0.0 -461.3 789.7 -2503.6 920.6 -1013.5 -2596.5 300.8 2160.9 0.7 48.2 1909.0 28.7 45.5

FINANCIALPROJECTIONS OperationalPerformanceRs.Cr.BalanceSheet
Particulars Net Sales Oth. Inc. Total Income Cost of Sales PBDILT Depreciation PBILT Fin. Charges Op Pr. bfr. Tax Ext.-ord. Items PBT Less: Tax PAT FY' 09 7236.2 632.4 7868.6 6095.3 1773.3 328.9 1444.4 327.8 1116.7 0.0 1116.7 194.5 922.2 FY' 10E 6274.8 758.8 7033.6 4959.5 2074.0 415.2 1658.8 422.0 1236.8 0.0 1236.8 210.3 1026.6 FY'11E 6940.3 910.6 7850.9 5460.9 2390.0 443.2 1946.8 530.0 1416.8 0.0 1416.8 240.9 1175.9 FY' 12E 7586.3 1092.7 8679.0 6020.8 2658.2 471.1 2187.1 560.0 1627.1 0.0 1627.1 276.6 1350.5 Particulars Assets Fixed Assets Investments NCA/NWC Current Assets Current Liab. Tot. Cap. Emp. Liabilities Share Capital Reserves Misc. Exp. Net Worth Term Liab. Tot. Cap. Emp. FY'09 5951.7 5443.5 2495.4 4681.1 2185.8 13890.6 221.4 8470.9 0.0 8692.4 5198.2 13890.6 FY' 10E 6256.5 5493.5 5924.1 7709.8 1785.8 17674.1 236.3 10780.4 0.0 11016.7 6657.4 17674.1 FY'11E

Rs.Cr.
FY'12E 6742.2 5993.5 6832.4 9118.2 2285.8 19568.1 236.3 12668.3 0.0 12904.6 6663.6 19568.1 6513.3 5693.5 6327.2 8412.9 2085.8 18534.0 236.3 11637.1 0.0 11873.4 6660.6 18534.0

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Tata Power Co. Ltd.

KeyRatiosCashFlowsRs.Cr.
Particulars GrTotInc. GroPAT PBDITMar PATMar ROCE RONW Gearing(x) Ov.Gearing(x) Curr.Ratio(x) Int.Cov.(x) Drs.Turnover SalesPerShare EPS(Rs.) CshEPS(Rs.) DPS(Rs.) BV(Rs.) FY09 22.68% 6.01% 22.54% 11.72% 11.54% 10.99% 0.60 0.63 2.14 4.41 5.24 355.34 39.03 60.8 11.56 392.54 FY10E 10.61% 11.32% 29.49% 14.59% 10.51% 10.42% 0.60 0.60 4.32 3.93 5.07 297.68 43.45 61.0 11.50 466.26 FY11E 11.62% 14.55% 30.44% 14.98% 10.75% 10.27% 0.56 0.56 4.03 3.67 6.10 332.27 49.77 68.5 11.50 502.52 FY12E 10.55% 14.84% 30.63% 15.56% 11.48% 10.90% 0.52 0.52 3.99 3.91 5.83 367.32 57.16 77.1 11.50 546.16 Particulars PAT Depreciation Misc Exo w/o Change in WC Op. Cash Flow Chg. In GB Chg. In WIP Chg. In Inv. Csh Flw Inv. Act. Pay. of Div. Chg. in Trm Liab Chg. in Sh. Cap. Chg in Sh. Prem. Csh Fl fr. Fin. Act Op Cash Bal. Cl. Cash Bal. FY09 922.2 328.9 0.0 461.3 789.7 2503.6 920.6 1013.5 2596.5 300.8 2160.9 0.7 48.2 1909.0 28.7 45.5 FY10E 1026.6 415.2 0.0 10.0 1431.8 670.0 50.0 50.0 770.0 319.3 1459.2 14.8 1602.2 2757.0 45.5 3464.2 FY11E 1175.9 443.2 0.0 360.0 1259.1 650.0 50.0 200.0 900.0 319.3 3.3 0.0 0.0 316.0 3464.2 3507.3 FY12E 1350.5 471.1 0.0 460.0 1361.6 650.0 50.0 300.0 1000.0 319.3 2.9 0.0 0.0 316.3 3507.3 3552.5

UmeshGupta RaviGupta PavitraSubramanian HeadCapitalMarkets HeadResearch HeadSales umesh@matasec.com ravi@matasec.com pavitra@matasec.com 02222657907 02265208816 02222695012

MATA SECURITIES (INDIA) PVT LTD 2-Rahimtoola House, 1st Floor, 7 Homji Street, Fort, Mumbai 400001

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