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Tata Power: Lower tariffs hurt sales - Views on News from Equitymaster

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Tata Power: Lower tariffs hurt sales
Jan 19, 2010

Performance summary
  • Standalone sales fall by 12% YoY during 3QFY10. This is despite a marginal rise in electricity generation and volume sales. Change in fuel mix and reduction in power tariffs in Mumbai lead the decline in sales.
  • Operating margins rise to 21.3% during the quarter from just 12.7% in 3QFY09 – improvement aided by lower fuel costs (as percentage of sales).
  • Despite a 48% YoY rise in operating profits, net profits grow by just around 29% YoY. Higher depreciation and taxes eat into the bottomline.
  • During 9mFY10, while sales decline by 9% YoY, net profits grow by 25% YoY.


Standalone performance
(Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Power generation (m units) 3,847 3,851 0.1% 11,241 12,157 8.1%
Units sold (m units) 3,711 3,714 0.1% 11,203 11,829 5.6%
Net sales 17,415 15,278 -12.3% 56,549 51,757 -8.5%
Expenditure 15,208 12,024 -20.9% 49,363 38,900 -21.2%
Operating profit (EBDITA) 2,206 3,254 47.5% 7,186 12,856 78.9%
Operating profit margin (%) 12.7% 21.3%   12.7% 24.8%  
Other income 814 839 3.0% 4,286 3,558 -17.0%
Interest 952 922 -3.1% 2,154 3,117 44.7%
Depreciation 809 1,208 49.3% 2,303 3,510 52.4%
Profit before tax 1,260 1,963 55.8% 7,016 9,788 39.5%
Tax 109 484 343.0% 1,340 2,706 102.0%
Profit after tax/(loss)# 1,151 1,479 28.5% 5,676 7,082 24.8%
Net profit margin (%) 6.6% 9.7%   10.0% 13.7%  
No. of shares       221.4 231.0  
Diluted earnings per share (Rs)*         46.0  
P/E ratio (x)*         30.9  
* On a trailing 12-months basis

What has driven performance in 3QFY10?
  • Despite a marginal increase in volume sales of electricity, Tata Power saw its standalone sales (in value terms) decline by 12% YoY during 3QFY10. The company has attributed this to lower power tariffs, which were a result of lower fuel costs (as the company has to pass on lower costs to customers in terms of lower tariffs). The company produced more power using gas this quarter (as against oil), which led to lower fuel costs and subsequently lower tariffs. Its generation capacity stood at over 2,900 MW at the end of December 2009.

  • On the back of lower fuel costs as also lower cost of power purchased from external sources, Tata Power managed to improve its margins substantially to 21.3% during 3QFY10. Fuel costs were at 62% of sales in 3QFY10 as compared to 73% in 3QFY09.

  • Despite a 48% YoY growth in operating profits, Tata Power grew its net profits by a much lower 29% YoY during 3QFY10. Higher depreciation and tax expenses (owing to higher MAT or minimum alternate tax) led to this impact on the bottomline. Depreciation was higher (by 49% YoY) primarily due of commissioning of new generation capacities.

What to expect?
At the current price of Rs 1,420, the stock is trading at a multiple of 2.5 times our estimated FY12 book value per share. The management indicated during the conference call that its capacity expansion programmes at Mundra (4,000 MW) and Maithon (1,050 MW in 74:26 joint venture with Damodar Valley Corp.) are progressing as per schedule. The ultra-mega project at Mundra is in fact 42% complete. The company’s expects the first unit to become operational by September 2011. At the current valuations, we have a cautious view on the stock.

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