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Needs a power-packed strategy... - Views on News from Equitymaster
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  • Feb 26, 2000

    Needs a power-packed strategy...

    Its been a long time since the Tata Electric Companies hit the headlines. That changed a few days ago when it replaced Cogentrix, USA in the Mangolare Power Project. No one really expected TEC to take over from where Cogentrix left off and the question everyone's asking is whether this underlines a change of strategy after all these years of passivity.

    The Tata Electric Companies (TEC) is not really a company, but a basket of three listed companies - Tata Power, Andhra Valley and Tata Hydro-Electric. Most of the companies assets are owned jointly and the companies share income and expenses in the ratio of 5:3:2. TEC holds a licence to supply power to Mumbai until 2014. The three power companies between them have an installed capacity of over 1,700 MW. The reason behind TEC's trinitarian business structure is the high stamp duty payable on the merger, which has impeded the amalgamation of the companies.

    (Rs m) 3QFY2000 3QFY1999 % change
    Sales 7,478.80 5,678.40 32%
    Other Income 720.30 564.90 28%
    Non-recurring income 88.20 13.60 549%
    Total expenditure 5,669.60 3,685.60 54%
    Interest 482.00 538.20 -10%
    Depreciation 505.30 474.10 7%
    Profit before Tax 1,630.40 1,559.00 5%
    Tax 625.20 763.40 -18%
    Profit after Tax/(Loss) 1,005.20 795.60 26%
    Net profit margin (%) 12.1% 12.7%  

    TEC's licensee operations are controlled by the Maharashtra State Electricity Board (MSEB). The latter's operations form part of the western grid, which comprises the states of Maharashtra, Gujarat and Madhya Pradesh.

    For long TEC has been snubbed by the investment community for being too laid back where bagging independent power projects (IPPs) was concerned. But its approach is justified when one looks at companies that have vigorously pursued private projects and don't really have much to show for their efforts. But that is not to say that IPPs are filled with pitfalls. In the past TEC has learnt the virtues of following a judicious policy with IPPs and has now shrugged off its lethargy. Bagging the Mangolore Power Project is testimony to this, although it had a lot to do with Cogentrix's withdrawal.

    This move on the part of Tata Electric Companies can be seen as a means of getting into power projects outside Maharashtra to enhance geographical reach as growth potential in Mumbai is limited. These projects will also enable the company to increase its profits from IPPs and not depend solely on profits from Mumbai.

    Until now, TEC was content with pursuing a growth policy by acquiring power plants of group companies. For instance, it acquired Tata Steels' Jojobera plant (67.5 MW) for Rs 3 billion in financial year 1997. Next was the acquisition of the Associated Cements Companies' (ACC) 35 MW Wadi power plant. However, there's a limit to how much acquisition through this route can fuel the company's growth.

    It was to circumvent this limitation that the company bid for a circle in Orissa - Cesco. However, the company's effort was laced with disappointment as its bid was frustrated by its inability to furnish a letter of credit. Cesco's sustained losses arising out of high transmission and distribution inefficiencies was another reason for TEC dropping the bid. An unsettling matter for TEC was BSES' (its main competitor) successful bid for the other 3 circles in Orissa.

    Tata Power share price graph

    TEC has chalked out investment plans amounting to over Rs 48 billion spanning the next 3 years. Projects valued at Rs 26 billion have already taken off. These projects will mark TEC's expansion foray in the states of Bihar, Orissa, Karnataka and Madhya Pradesh. The Jojobera expansion and Bhivpuri project will form the cornerstone of TEC's expansion. In all, the new projects will enhance installed capacity by 600 MW. There is also talk of the company's proposed joint venture with Total of France for storage and distribution of liquefied natural gas (LNG).

    The investments will definitely fuel TEC's expansion, and expand it must. BSES, its largest consumer (until 2 years ago) now has its own 500 MW power plant and no longer relies on TEC. So while its traditional customers are shunning TEC, it will need to expand by undertaking more (lucrative) licence areas, which is a long-drawn out process with deep political undertones. Bagging IPPs aggressively and judiciously is a more feasible option.

    Bagging the Mangalore Power Project is a good start for TEC. But it will be interesting to note whether it is a one-off thing or a sustained effort on the company's part to grow rapidly. This is the only way the company can avoid being short-circuited by competitors, who have shown more aggression and pace in their strategy.



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