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Tata Power: Tax reversals save the day! - Views on News from Equitymaster
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Tata Power: Tax reversals save the day!
Jan 31, 2007

Performance summary
India’s largest private sector power generator, Tata Power, has announced lacklustre results for the third quarter and nine-months ended December 2006. For 3QFY07, revenue decline of 2% YoY, combined with 74% YoY fall in other income, has led to the profit before tax declining by 49% YoY. But for a reversal in current tax due to provisions made in earlier years, the bottomline (up 23% YoY) would have been under pressure as well. For 9mFY07, while revenues have grown by 12% YoY, on the back of contraction in operating margins and lower other income, profit before tax is lower by 14% YoY. Importantly, other income for 3QFY06 and 9mFY06 included one time profit on account of sales of stake in a couple of subsidiaries.

Standalone financial performance: A snapshot
(Rs m) 3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Sales 12,248 12,005 -2.0% 33,720 37,706 11.8%
Expenditure 10,280 9,898 -3.7% 26,938 30,522 13.3%
Operating profit (EBDITA) 1,968 2,108 7.1% 6,782 7,184 5.9%
Operating profit margin (%) 16.1% 17.6%   20.1% 19.1%  
Other income 1,766 460 -74.0% 2,502 1,653 -33.9%
Interest 424 510 20.3% 1,233 1,423 15.4%
Depreciation 712 735 3.2% 2,049 2,226 8.6%
Profit before tax 2,598 1,322 -49.1% 6,001 5,188 -13.5%
Tax 321 (1,477)   1,284 (853)  
Profit after tax/(loss) 2,277 2,799 23.0% 4,717 6,041 28.1%
Net profit margin (%) 18.6% 23.3%   14.0% 16.0%  
No. of shares       197.9 197.9  
Diluted earnings per share (Rs)*         35.8  
P/E ratio (x)*         16.9  
* 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. Apart from power generation, the company also has interests in areas like transmission and distribution and power trading.

What has driven performance in 3QFY07?
Realisation led pressure on topline: The 2% YoY decline in Tata Power’s 3QFY07 topline was largely on the back of pressure on realisations, as volume sales represented a decent 9% YoY growth. Out of this, sales in the Mumbai license area recorded a 5.4% YoY growth during the quarter. Higher sales were backed by 12% YoY growth in electricity generation, which was a consequence of increase in generation (29% YoY) at the company’s Jojobera units. For the nine-month period, while generation was up 5% YoY, sales volumes grew by 7% YoY.

The company is currently working on a 250 MW coal based unit at Trombay (Trombay’s current capacity is 1,330 MW). This expanded capacity is expected to get commissioned in FY09 and will cater to increasing energy requirements in the Mumbai region. The company is also in process of setting up 100 MW of diesel generating sets, also to cater to demand in Mumbai. Also, during the quarter, Tata Power won the bid for setting up one of India’s first two ultra-mega power projects(UMPPs) at Mundra (Gujarat) with a capacity of 4,000 MW. In our estimates, we have factored in just the 250 MW Trombay expansion and, as such, it is very likely that there will be an upside to our numbers post FY09.

Lower power purchase costs aid margins: On the back of decline in cost of power purchased, from 17% of sales in 3QFY06 to 10% in 3QFY07, Tata Power reported a 150 basis points (1.5%) expansion in operating margins during 3QFY07. Fuel prices, however, continued their rise in this quarter as well. From nearly 53% of sales in 3QFY06, these increased to just under 60% of sales in 3QFY07.

Tax reversals save the bottomline: In 3QFY06, Tata Power had recorded one time profit of Rs 1.3 bn on account of sale of stake in its subsidiaries – Tata Power Broadband and Alaknanda Hydro Power. In the absence of any such income during 3QFY07, the other income component has reported a decline of 74% YoY. This, combined with the fall in topline, has led to the company’s profit before tax recording a 49% YoY decline during the quarter. However, the company has also reported tax reversals to the tune of Rs 1.6 bn during 3QFY07, which has helped its net profits grow at a rate of 23% YoY.

What to expect?
At the current price of Rs 603, the stock is trading at a multiple of 13.6 times and 1.9 times our estimated FY09 earnings and book value for the company. While the winning of the Mundra UMPP is a long-term positive for the company, we remain concerned about the general rise in raw material costs, which continue to pare its profitability levels. We had recommended a ‘Buy’ on the stock in July 2006 at Rs 476 with a target price of Rs 630 (based on our DCF valuation analysis). At the current juncture, considering that the stock is nearing the target, we shall take a re-look at our assumptions for the company and will soon update subscribers with our latest view on the stock.

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Feb 20, 2018 03:35 PM


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