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Tata Power: Accounting plays the trick
Jan 30, 2009

Performance summary
  • Net sales grow by 25% YoY during 3QFY09, 35% YoY during 9mFY09. Growth mainly aided by improvement in realisation as volume sales grew at a tepid pace.
  • Operating margins contract by a sharp 4.5% YoY during the quarter on the back of higher fuel costs (as percentage of sales).
  • Net profits decline on the back of pressure on operating margins, higher interest expenses and change in accounting policy. Had the changed accounting method been followed last year, the profits would have declined by 13% YoY instead of the reported 42% YoY.


Financial performance snapshot (Standalone)
(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Generation (m units) 3,672 3,847 4.8% 11,216 11,241 0.2%
Sales (m units) 3,614 3,711 2.7% 11,481 11,203 -2.4%
Net sales 14,194 17,769 25.2% 42,814 57,619 34.6%
Expenditure 11,513 15,208 32.1% 35,032 49,363 40.9%
Operating profit (EBDITA) 2,682 2,560 -4.5% 7,782 8,256 6.1%
Operating profit margin (%) 18.9% 14.4%   18.2% 14.3%  
Other income 368 460 24.9% 2,836 3,216 13.4%
Interest 386 952 146.8% 1,357 2,154 58.7%
Depreciation 705 809 14.8% 2,128 2,303 8.2%
Profit before tax 1,960 1,260 -35.7% 7,133 7,016 -1.6%
Tax (13) 109   684 1,340 95.9%
Profit after tax/(loss)# 1,973 1,151 -41.7% 6,449 5,676 -12.0%
Net profit margin (%) 13.9% 6.5%   15.1% 9.9%  
No. of shares       217.4 221.4  
Diluted earnings per share (Rs)*         35.8  
P/E ratio (x)*         21.2  
On a trailing 12-months basis
# Excluding extraordinary adjustments

What has driven performance in 3QFY09?
  • Tata Power grew its standalone sales by 25% YoY during 3QFY09. The company largely benefited from higher realisation, which at an average of Rs 4.8 per unit was 22% YoY higher than the Rs 3.9 per unit rate earned in 3QFY08. The growth in sales could however have been better but for the fact that volume sales grew by just 3% YoY on the back of 5% YoY rise in generation during the quarter.

  • Tata Power’s operating margins declined by a sharp 4.5% YoY during the quarter. This was on account of the rise in fuel costs. As percentage of sales, these costs increased from 67.9% in 3QFY08 to 71.8% in 3QFY09.

  • The company’s net profits declined in 3QFY09. This was on the back of pressure on operating margins, higher interest expenses and change in accounting policy. Had the changed accounting method been followed in 3QFY08, the profit decline in 3QFY09 would have been just around 13% YoY instead of the reported 42% YoY.

What to expect?
At the current price of Rs 760, the stock is trading at a multiple of 1.6 times our estimated FY11 book value for the company. Tata Power’s 9mFY09 topline performance has been fairly in line with our estimates. However, given the fact that the company’s profits have been impacted by the change in accounting policy, we will be revising our numbers downwards.

The management has indicated that all its power generation projects (Mundra UMPP, Maithon, Jojobera and Trombay) are running as per schedule and that it has organised loans for each of them. The first unit of the Mundra UMPP is likely to be commissioned by September 2011. We maintain positive view on the stock from a 2 to 3 years perspective.

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