Tata Power: Will it sustain?

The Tata Power Company has had a good run on the bourses recently. The stock has run up an impressive 102% in the last six months. But the question is will this valuation last?

To answer this question let’s analyse Tata Power’s valuations. Tata Power generating capacity stands at 1,842 MW. This is a mix of thermal and hydel power (70:30 approximately). A few months back Tata Power paid Rs 8.6 bn (US$ 185 m) to hike its stake by 20% in Mangalore Power Company (MPC) to 50%. MPC is setting up a 1000 MW thermal power plant at Mangalore. Effectively, Tata Power paid Rs 8.6 bn for 200 MW of generating capacity.

Going by this valuation alone, Tata Power’s 70% thermal capacity (1,290 MW) is worth Rs 55.4 bn. This means that the value per share, taking into account only the company’s thermal capacity works out to be Rs 273.

This is another method of valuation. Now let’s compare Tata Power with a global power company, AES Corporation and see where it stands.

The AES Corporation, founded in 1981, is the world’s largest global power company. AES generates and distributes electricity and is also a retail marketer of heat and electricity. AES owns or has an interest in one hundred and sixty plants totaling over 54,000 MW in 23 countries. AES also distributes electricity in 9 countries through 19 distribution businesses. In addition to having assets in excess of US$ 29 bn, the company has numerous projects in construction or late stages of development.

If you look at the table, you find the valuations of Tata Power quite low as compared to AES. This is because AES is a global company with a capacity that is almost 25 times Tata Power. But what this comparision does bring out is that, Tata Power’s valuation, despite the huge run up recently, has the potential to move up even more.

If the government of India withdraws the 16 percent cap on the rate of return for power projects in the upcoming budget and instead states that power companies will compete on the efficiency of their plants and tariffs, then Tata Power stands to gain even more. But this is a long shot.

Globally, power companies trade at P/e multiples of 10-15 times their earnings. Based on this Tata Power looks undervalued.