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Tata Power: Mundra woes continue

Feb 12, 2013

Tata Power has declared the results for the third quarter and nine month period of financial year 2012-13 (9mFY13). The company reported a 20% YoY growth in standalone net revenues while net profits decline by about 22% YoY during the period. Here is our analysis of the results.

Performance summary
  • Standalone revenues grow by 20% YoY during 9mFY13.
  • Standalone operating profits increase by 10% YoY as margins contract by about 1.9% YoY to 20% during 9mFY13. Margins drop largely due to higher cost of power purchased as well as higher cost of fuel (as a percentage of sales).
  • Lower other income, coupled with higher interest costs lead to a decline in net profits to the tune of 21.7% YoY.
  • On consolidated basis, the company revenues increase by 36% YoY during the quarter and by 28% YoY during 9mFY13.

Standalone financial performance
(Rs m) 3QFY12 3QFY13 Change 9mFY12 9mFY13 Change
Generation 3,970 3,873 -2.4% 7,661 8,531 11.4%
Sales 3,922 3,998 1.9% 7,725 8,462 9.5%
Net revenue 22,519 25,491 13.2% 61,212 73,530 20.1%
Expenditure 17,743 19,806 11.6% 47,808 58,807 23.0%
Operating profit (EBDITA) 4,775 5,685 19.1% 13,403 14,724 9.9%
EBDITA margin (%) 21.2% 22.3%   21.9% 20.0%  
Other income 4,105 318 -92.2% 9,903 5,737 -42.1%
Depreciation 1,512 1,281 -15.3% 4,195 4,385 4.5%
Interest 1,308 1,788 36.7% 3,761 4,817 28.1%
Profit before tax 6,060 2,934 -51.6% 15,351 11,258 -26.7%
Tax 1,479 770 -47.9% 4,823 3,011 -37.6%
Effective tax rate 24% 26%   31% 27%  
Profit after tax/(loss) 4,582 2,164 -52.8% 10,528 8,247 -21.7%
Net profit margin (%) 20.3% 8.5%   17.2% 11.2%  
No. of shares (m)         2,373.1  
Diluted earnings per share (Rs)*         3.2  
Price to earnings ratio (x)         30.4  
* On a trailing 12-months basis

What has driven performance in 9mFY13?
  • Tata Power's generation volumes increased by over 11% YoY during the 9mFY13 period ended December 2012. During the quarter 3QFY13, generation volumes were down by 2.4% YoY. Lower generation was largely due to outage coupled with lower demand in Mumbai operations. Generation outside Mumbai - Jojobera primarily was higher due to increased demand from Tata Steel, amongst others. Sales volumes during 9mFY13 were higher by 9.5% YoY, while the company's net revenues were higher by 20% YoY during the period. Tata Power's operating margins declined by 1.9% YoY during 9mFY13 largely on account of higher cost of power purchased as well as higher cost of fuel (as a percentage of sales).

  • On segmental basis, revenues from the power segment were up 64% YoY; those from the coal segment were down by 9% YoY in 3QFY13. Operating margins for the power segment went up at 15% in 4QFY13 from 12% in 3QFY12. For the coal business, margins were higher at 13% in 3QFY13 as compared to 5% in 3QFY12.

  • As mentioned during the previous quarter, in order to support the cash flows of Mundra UMPP, Tata Power plans to transfer 75% of its equity interest in the Indonesian coal units to its subsidiary Coastal Gujarat Power Ltd (CGPL). This will protect the standalone business from the risk of price volatility on coal to be used in power generation, to the extent not covered by price escalations and to support its cash flows.

  • The other income came in lower by almost 92% YoY in 3QFY13 mainly a loss on exchange on adoption of AS-11 in previous year. Also, due to lower dividends from coal SPVs.

  • The higher interest charges are due to the hybrid bond issuance.

What to expect?
At the current price of Rs 97, the stock is trading at a multiple of about 1.27 times our estimated FY15 book value.

Tata Power's woes with its Mundra project continue. The company's consolidated profits took a hit of Rs 6 bn during the quarter ended December 2012 on account of impairment losses. The company has cited uncertainty of cash flows as the reason for the same. Total impairment losses in the 9mFY13 period stand at Rs 8.5 bn as compared to full year FY12's impairment losses of Rs 18 bn. These losses however come in at a time when the company has filed a petition with the CERC to revise its tariffs given the increased fuel costs. The outcome of the same would be crucial for the company.

Nevertheless, we believe that all the negatives have been priced into the stock's valuations and any positive developments here on would only add to upside. Given the strong moat that the company possesses as the largest private power producer and a probable turnaround in the UMPP business over the medium term, we believe Tata Power's consolidated return ratios will see significant upsides as well. Hence, despite the possibility of some near term hiccups (our estimates and target price have been revised accordingly), we believe investors should hold on to their current positions and not purchase any more shares of the company.

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