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Tata Power: Lower tax reversals hit bottomline
Jan 30, 2008

Performance summary
  • Sales grow 18% YoY in 3QFY08, 14% YoY in 9mFY08. Growth during the quarter led by 20% YoY increase in electricity tariffs as volume sales decline by 1% YoY.
  • Operating margins expand by 0.7% during the quarter, owing to lower cost for power purchased (as percentage of sales).

  • Net profits down 30% YoY in 3QFY08, due to lower tax reversals as compared to 3QFY07.

Financial performance snapshot
(Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Sales 11,997 14,194 18.3% 37,679 42,814 13.6%
Expenditure 9,855 11,559 17.3% 30,580 34,610 13.2%
Operating profit (EBDITA) 2,142 2,635 23.0% 7,099 8,205 15.6%
Operating profit margin (%) 17.9% 18.6%   18.8% 19.2%  
Other income 460 414 -9.9% 1,653 2,413 46.0%
Interest 545 386 -29.2% 1,338 1,357 1.4%
Depreciation 735 705 -4.1% 2,226 2,128 -4.4%
Profit before tax 1,322 1,960 48.2% 5,188 7,133 37.5%
Tax (1,477) (13) -99.1% (853) 684 -180.2%
Profit after tax/(loss) 2,799 1,973 -29.5% 6,041 6,449 6.8%
Net profit margin (%) 23.3% 13.9%   16.0% 15.1%  
No. of shares         217.4  
Diluted earnings per share (Rs)*         32.9  
P/E ratio (x)*         39.5  
* On a trailing 12 m0nth basis

What has driven performance in 3QFY08?
  • Tata Power’s topline grew by 18% YoY during 3QFY08. This growth was largely a result of a sharp jump in power tariffs, which increased from Rs 3.24 per unit in 3QFY07 to Rs 3.89 per unit in 3QFY08 (growth of 20% YoY). The growth in topline would have been higher but for the decline in volumes sales of electricity (down 1% YoY). The company grew its generation by 2% YoY during 3QFY08, owing to better capacity utilisation at the Trombay and Jojobera plants.

    The management has indicated that work on its 4,000 MW ultra mega power project at Mundra is progressing on schedule. After completing the acquisition of 30% stake in the Indonesian coal mining company for securing fuel for this plant and then signing of EPC contract with Toshiba Corporation for supply of five 800 MW steam turbine generators, this quarter saw the company place orders for the main equipments and begin site preparatory works. Other expansion plans are also progressing well, as reported in the company’s result press release.

  • Tata Power’s operating margins expanded by 0.7% during the quarter, owing to lower cost for power purchased (as percentage of sales). These costs declined from 10% of sales during 3QFY07 to 3.6% of sales in 3QFY08. Higher generation at own plans seems to be the reasons for a decline in these costs. Fuel costs increased from 59.5% of sales in 3QFY07 to 67.9% in 3QFY08, thus paring the gains in operating margins.

  • On the back of lower tax reversal during 3QFY08 as compared to 3QFY07, Tata Power has recorded a decline of 30% YoY in its net profits during the quarter. As a matter of fact, in 3QFY07, the company had made tax reversal of Rs 1.3 bn owing to a favourable order from the regulator pertaining to the Mumbai license area. On the PBT level, the growth for 3QFY08 stands at 48% YoY, which is pretty strong.

What to expect?
At the current price of Rs 1,300, the stock is trading at a multiple of 23.2 times and 3.6 times our estimated FY10 earnings and book value respectively. The fact that the stock has moved up sharply over the past couple of months despite any change in business fundamentals makes us a bit cautious. However, considering that the company is progressing well on its generation capacity expansion plans, we maintain our positive view on the long-term growth prospects of the company. We shall soon update our research report on the company.

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