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Tata Power: A look ahead!

Jan 5, 2004

With the opening up of Indian power sector, not only have the opportunities increased significantly, but also competition amongst the existing power players. Let's have a look at the issues which can create problems for the India's largest private sector power player i.e. Tata Power. With the open excess provision of the recent Electricity Act, companies like Tata Power will not be able to charge premium for the power supplied for long. Currently, Reliance Energy buys around 500 MW (4,400 million units) power from Tata Power. Tata Power is charging Rs 3.5 per unit of power supplied to Reliance Energy. However, if open excess is permitted, then Reliance Energy will be able to buy power from other sources like NTPC at Rs 2.5 per unit to Rs 2.7 per unit. This is likely to subdue profitability.

The other issues which remains a cause of concern is the unutilised capacities in Mumbai region like Dhabol Power plant. If the Dhabol Power plant were to become operational, the entire power scenario in the region would be in a state of flux. The buyer of the plant will definitely go for enforcement of the state government's agreement with Enron. Therefore, MSEB, who is currently buying around 600 MU from Tata Power, will also have options.

Investors should remember that the company had invested in unrelated business like petroleum exploration, telecommunication and broadband infrastructure in the past. Though the company has exited from broadband business and is looking to sell off its petro business (Tata Petrodyne), the company's intentions to invest in 'adjacent infrastructure businesses', as mentioned in its 2003 annual report (no clarity regarding the same), raises concerns once again.

The stock price of the company has gained substantially on the bourses in last one year. The graph below represents the returns on Rs 100 invested in the BSE Sensex and Tata Power. As against 78% returns on the Sensex, Tata Power has risen by around 194%.

At the current price level of Rs 333, the stock trades at P/E multiple of 11.9x expected FY04 earnings. On the basis of issues mentioned above, we expect the EPS to come under pressure. However, in longer term, once the new capacities start contributing to topline, things are likely to improve.

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