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Tata Power: Coal mining charge dents profits - Views on News from Equitymaster

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Tata Power: Coal mining charge dents profits

Feb 26, 2010

Performance summary
  • Consolidated sales fall by 6% YoY during 3QFY10, grow 2% YoY during 9mFY10. Lower sales in both the power and coal businesses lead to the weak performance during the quarter.
  • Operating margins fall substantially to 12.6% in 3QFY10. This is due mainly to a one-time expense of Rs 350 m for the coal mining business on account of change in some contractual arrangements related to mining costs. Excluding this cost, operating margins during the quarter are almost same as 3QFY09 level.
  • On the back of a 47% YoY decline in operating profits, and higher depreciation, net profits decline by 81% YoY during 3QFY10. Profits down 22% YoY during 9mFY10.

Consolidated performance
(Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Net sales 46,215 43,404 -6.1% 133,282 136,328 2.3%
Expenditure 35,941 37,937 5.6% 107,365 109,302 1.8%
Operating profit (EBDITA) 10,274 5,468 -46.8% 25,917 27,026 4.3%
Operating profit margin (%) 22.2% 12.6%   19.4% 19.8%  
Other income 508 385 -24.1% 2,343 1,856 -20.8%
Interest 2,012 1,853 -7.9% 5,185 5,786 11.6%
Depreciation 1,618 2,208 36.4% 4,930 6,463 31.1%
Profit before tax 7,151 1,792 -74.9% 18,145 16,634 -8.3%
Tax 1,688 265 -84.3% 4,633 5,497 18.7%
Share of profit/(loss) of associates (25) 10   148 194  
Minority interest 247 551   621 1,130  
Profit after tax/(loss)# 5,192 986 -81.0% 13,039 10,201 -21.8%
Net profit margin (%) 11.2% 2.3%   9.8% 7.5%  
No. of shares       221.4 237.2  
Diluted earnings per share (Rs)*         39.4  
P/E ratio (x)*         31.0  
* On a trailing 12-months basis

What has driven performance in 3QFY10?
  • Tata Power saw its consolidated sales decline by 6% YoY during 3QFY10. This was a result of decline in sales from both the power (sales down 2% YoY) and coal mining (sales down 14% YoY) businesses. As we had discussed during the analysis of the company’s standalone results, the decline in power sales can be attributed to lower tariffs. This is because the company had to pass on the benefit of lower fuel costs to its customers. The company produced more power using gas (as against oil) during 3QFY10, which led to lower fuel costs and subsequently lower tariffs. Its generation capacity stood at over 2,900 MW at the end of December 2009.

  • Tata Power’s operating profits declined by 47% YoY during 3QFY10. This was owing to a substantial decline in operating margins – from 22.2% in 3QFY09 to 12.6% in 3QFY10. The biggest reason for this decline in margins was a one-time charge of Rs 350 m for the coal mining business on account of change in some contractual arrangements related to mining costs. Excluding this cost, operating margins during the quarter stood at almost the same level as in 3QFY09. As for the company’s fuel costs, these declined from 31% of sales in 3QFY09 to 25.3% in 3QFY10.

  • On the back of sharp decline in operating margins (as discussed above), Tata Power’s consolidated net profits dropped by 81% YoY during 3QFY10. As for 9mFY10, net profits were down by around 22% YoY.

What to expect?
At the current price of Rs 1,220, the stock is trading at a multiple of 2.1 times our estimated FY12 book value per share. The management has indicated that the company’s capacity expansion programmes at Mundra (4,000 MW) and Maithon (1,050 MW in 74:26 joint venture with Damodar Valley Corp.) are progressing as per schedule. The ultra-mega project at Mundra is in fact 42% complete. The company’s expects the first unit to become operational by September 2011. Given the one-time charge the company has incurred for its coal mining business, and which would impact its full year earnings, we will have to lower our FY10 estimates to that extent. At the current valuations, we have a cautious view on the stock.

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