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Tata Power: Future scope! - Views on News from Equitymaster
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Tata Power: Future scope!
Jan 23, 2006

Performance Summary
India’s largest private sector power company, Tata Power, announced mixed results for the third quarter and nine-month period ending December 2005. Despite a decline in generation volumes, the company has managed to record higher sales of electricity during the quarter, thereby improving its topline performance. Operating margins have, however, witnessed pressure on account of rise in cost of fuel and power purchased. Strong net profit growth has thus been propelled by a substantially higher other income during the quarter.

Financial performance: A snapshot
(Rs m) 3QFY05 3QFY06 Change 9mFY05 9mFY06 Change
Sales 9,409 12,314 30.9% 29,681 33,917 14.3%
Expenditure 7,172 10,346 44.2% 21,723 27,135 24.9%
Operating profit (EBDITA) 2,237 1,968 -12.0% 7,959 6,782 -14.8%
Operating profit margin (%) 23.8% 16.0%   26.8% 20.0%  
Other income 789 1,766 123.9% 1,951 2,502 28.3%
Interest 429 424 -1.1% 1,514 1,233 -18.5%
Depreciation 608 712 17.2% 2,568 2,049 -20.2%
Profit before tax 1,989 2,598 30.6% 5,828 6,001 3.0%
Extraordinary income/(expense)            
Tax 616 321 -47.9% 2,020 1,284 -36.4%
Profit after tax/(loss) 1,373 2,277 65.8% 3,808 4,717 23.9%
Net profit margin (%) 14.6% 18.5%   12.8% 13.9%  
No. of shares 197.9 197.9   197.9 197.9  
Diluted earnings per share* (Rs)         32.5  
P/E ratio* (x)         14.2  
* On a trailing 12-months basis            

What is the company’s business?
Tata Power (TPC) is the largest private player in the power sector with a generation capacity of 2,324 MW, which is around 19% of the total power generation capacity of the private sector in India and a mere 2% of the country’s total capacity. Out of this installed capacity, around 80% is used for supplying electricity to the Mumbai region. Power business contributes to around 95% of TPC’s revenues. Apart from power generation, the company also has interests in areas like transmission and distribution and power trading.

What has driven performance in 3QFY06?
Volume led growth: TPS replicated its 2QFY06 volume performance in this quarter as well, with the same growing at a similar rate of 10% YoY. The company sold 3,352 m units (MUs) during the quarter, 0.3% higher than 3,341 MUs that it sold during 2QFY06. Growth in volume sales was despite a 1% YoY decline in generation, which was compensated by purchase of 200 MW of power from outside Maharashtra. The Mumbai license area witnessed a growth of 7.5% YoY in volume sales and accounted for around 85% of the total volumes sold during the quarter. The quarter saw TPC commissioning its 120 MW thermal plant at Jojobera.

Segment-wise performance…
  3QFY05 3QFY06 Change 9mFY05 9mFY06 Change
Power Business  
Revenue 8,836 11,685 32.2% 28,198 32,159 14.0%
% share 92.8% 94.8%   94.5% 94.7%  
PBIT margin 22.8% 11.6%   20.8% 15.1%  
Others  
Revenue 689 637 -7.6% 1,648 1,799 9.2%
% share 7.2% 5.2%   5.5% 5.3%  
PBIT margin 3.1% -9.6%   3.5% -4.1%  
Total*  
Revenue 9,526 12,322 29.4% 29,846 33,958 13.8%
PBIT margin 21.4% 10.5%   19.9% 14.1%  
* Excluding inter-segment adjustments            
* Excluding inter-segment adjustments

Higher fuel and power purchase costs dent margins: Despite the strong growth in topline, TPC’s operating margins were burdened by higher fuel costs and cost of power purchased from outside. Fuel costs, were around 49% of sales in 3QFY05, rose to over 52% of 3QFY06 sales. Sustenance of high global crude oil prices and short supply of coal in the Indian market seems to have had their effect on fuel costs. Investors should note that the rise in fuel costs would have been higher but for the increased hydel power supply during the quarter on account of strong inflow of water into TPC’s lakes in Maharashtra post the heavy rainfall witnessed in July and August.

Extra-ordinary effect on bottomline: Despite the contraction in operating margins during the quarter, higher other income saved the day for TPC as far as the bottomline performance was concerned. This higher other income was on account of the Rs 1.3 bn profit on sale of the company’s broadband business to VSNL (total consideration of Rs 2 bn). The company also sold its entire stake in Alaknanda Hydro Power Company Limited to GVK Hydel Private Limited for a consideration of Rs 3.1 bn.

Performance in the recent past…
  1QFY05 2QFY05 3QFY05 4QFY05 1QFY06 2QFY06 3QFY06
Sales growth (YoY, %) 0.5 (11.4) (11.0) (7.4) 1.1 12.9 30.9
Profits growth (YoY, %) 2.2 (17.1) (25.6) 213.8 16.5 (11.4) 65.8
Operating margins (%) 32.4 23.4 23.8 16.3 21.9 22.6 16.0

What to expect?
At the current price of Rs 460, the stock is trading at a price to earnings multiple of 13.8 times our estimated FY08 earnings. The company has lined up large expansions plan for the future, which include the entire spectrum of the power sector – from power generation to transmission and distribution. This quarter saw Maithon Power Ltd. becoming the company’s subsidiary, consequent to the latter acquiring a 74% stake in the former. Through this venture, along with the other partner, Damodar Valley Corporation, TPC will set up a 1,000 MW thermal power project.

Apart from this, TPC is also working on adding a 250 MW generation unit at Trombay and another 100 MW generation unit in the Mumbai license area. This addition will significantly augment power supply to Mumbai, in the face of a looming power shortage. These initiatives, together with the process of shifting focus from being a Mumbai centric player to having a national presence, augurs well for TPC’s long-term growth.

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