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Tata Power: Coal biz's woes worsen - Views on News from Equitymaster
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Tata Power: Coal biz's woes worsen
Feb 10, 2015

Tata Power declared its results for the quarter and nine month period ended December 2014. The company's standalone revenues grew by 5% YoY, while profits declined 7% YoY during the quarter. Here is our analysis of the results.

Performance summary
  • Standalone revenues rise by 5% YoY. This is despite a 5% YoY decline in volumes.
  • Operating margins contract to 23.2% from 35.4% last year; operating profits decline by about a third. Net profits fall by about 7% YoY.
  • Consolidated revenues and profit before tax rises by 1% YoY and 296% YoY respectively.
  • During 9mFY15, standalone revenues and profits decline by 5% YoY and 8% YoY respectively.

Standalone financial performance
(Rs m) 3QFY14 3QFY15 Change 9mFY14 9mFY15 Change
Generation 3,212 2,954 -8.0% 10,513 9,378 -10.8%
Sales 3,547 3,385 -4.6% 11,445 10,647 -7.0%
Net revenue 20,079 21,090 5.0% 68,150 64,721 -5.0%
Expenditure 12,962 16,195 24.9% 47,579 48,971 2.9%
Operating profit (EBDITA) 7,118 4,896 -31.2% 20,570 15,750 -23.4%
EBDITA margin (%) 35.4% 23.2%   30.2% 24.3%  
Other income 553 2,435 340.3% 4,308 7,714 79.1%
Depreciation 1,484 1,294 -12.8% 4,240 4,168 -1.7%
Interest 2,143 2,730 27.4% 6,135 7,811 27.3%
Gain/ (Loss) on exchange (646) 492   (2,139) (414) -80.7%
Profit before tax 3,397 3,800 11.8% 12,363 11,073 -10.4%
Tax 886 1,453 64.0% 3,664 3,103 -15.3%
Effective tax rate 26% 38%   30% 28%  
Profit after tax/(loss) 2,511 2,346 -6.6% 8,699 7,969 -8.4%
Net profit margin (%) 12.5% 11.1%   12.8% 12.3%  
No. of shares (m)       2,373.1 2,704.6  
Diluted earnings per share (Rs)*         5.2  
Price to earnings ratio (x)         15.5  
*On a trailing 12-month basis

What has driven performance in 3QFY15?
  • Tata Power's standalone revenues rose by 5% YoY during the quarter. As per the company, growth was led by a good operational performance of its Mumbai operations, coupled with higher fuel and power purchase costs. However, operating performance was impacted by lower contribution from a Unit 8 at Trombay (under restoration). Further, last year's performance included a favourable ATE order of Rs 1.9 bn as well.

  • Tata Power's consolidated revenues during the quarter were higher by a percent. Growth was led by the company's power business (CGPL's higher availability and generation); however it was the coal business that was severally impacted during the quarter. Revenues from the business were down by about 18% YoY on account of lower prices. Further, profitability of the coal business would has also been wiped out if adjusted for the Rs 4 bn plus figure which was included in the form of forex gain for the quarter. Lower coal price (down by about US$ 11 to levels of US$ 52) realizations have been the main reason for the same. As for the power business' EBIT margins, the same stood at 16.8% as compared to 17.5% same quarter last year.
What to expect?

At the current price of Rs 80, the stock is trading at a multiple of about 1.53 times its FY14 book value per share.

Some of the key factors going against the company include lower coal prices, which has taken a toll on its coal business coupled with hurdles related to implementation of compensatory tariffs which are currently stuck in legal disputes.

On the other hand, the company's subsidiaries have been performing well. Barring CGPL's financial performance, total revenues and profits of the companies were up by 13% YoY and 77% YoY respectively.

While the stock of Tata Power has corrected substantially since our Sell recommendation, we believe that the not so clear visibility in growth coupled with the many uncertainties surrounding the company only compels us to maintain our view of staying away from this business for the time being.

We would like to remind our subscribers that for the purpose of risk minimisation, one should avoid having more than 5% exposure on any one stock from the overall equity portfolio. Please do visit our asset allocation section for further details.

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