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Tata Power: Other income windfall

Mar 10, 2012

Tata Power has declared the results for the third quarter of financial year 2011-12 (3QFY12). The company has reported 35% YoY growth in standalone net revenues while net profit has grown by 199% YoY. Here is our analysis of the results.

Performance summary
  • Standalone revenues grow by 18% YoY during 9mFY12, despite marginal 1.4% fall in electricity generation and 5.2% fall in sales volumes.
  • Standalone operating margins drop to 18.2% in 9mFY12, from 19.1% in 9mFY11 due to higher cost of power purchased as well as higher cost of fuel (as a percentage of sales).
  • Thanks to higher other income (due to amortization of forex losses, higher treasury income and dividends), net profits for the quarter and nine month period grew 199% YoY and 56% YoY despite lower operating margins.
  • Merchant realizations were higher by 43% YoY at 3.37/kwh as compared to 2.35 / kwh in 3QFY11.

Standalone numbers...
Rs (m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
Generation (MU) 3713 3970 6.9% 11794 11631 -1.4%
Sales (MU) 3824 3922 2.6% 12283 11647 -5.2%
Net revenue 15,958 21,610 35.4% 49,691 58,675 18.1%
Expenditure 13,200 17,767 34.6% 40,220 47,991 19.3%
Operating profit 2,758 3,843 39.3% 9,471 10,684 12.8%
EBIDTA margin (%) 17.3% 17.8%   19.1% 18.2%  
Other Income 1,412 5,011 254.9% 5,929 12,418 109.4%
Depreciation 1,286 1,511 17.5% 3,880 4,195 8.1%
Interest 1,094 1,279 16.9% 2,974 3,588 20.6%
Profit before tax 1,790 6,064 238.8% 8,546 15,319 79.3%
Tax 259 1,483 472.6% 1,807 4,792 165.2%
Effective tax rate 14.5% 24.5%   21.1% 31.3%  
Profit after tax/ (loss) 1,531 4,581 199.2% 6,739 10,527 56.2%
Net profit margin (%) 9.6% 21.2%   13.6% 17.9%  
No. of shares (m)         2,373.0  
Diluted earnings per share (Rs)*         5.4  
Price to earnings ratio (x)         20.3  
* (Trailing 12 month earnings)

What has driven performance in 3QFY12?
  • Tata Power's gross power generation at 11,631 MUs as against 11,794 MUs in 9mFY11 was down by around 1%. Generation in Mumbai region was 8,308 MUs as against 7,872 MUs in 9mFY11 up by 6% YoY. The generation outside Mumbai region was, however, down by 15% YoY.

  • The growth in revenue from the power business however remained steady as a result of improved realization per unit on the company's merchant sales. Total generation of power for the half year period was down due to lower generation in Mumbai.

  • Subsidiaries Tata Power Trading Company and Coal SPVs reported 471% YoY and 596% YoY growth in profits respectively for the third quarter (3QFY12). While the former was due to higher power volumes and realizations while the latter was due to dividend income.

  • Tata Power's standalone operating margins shrunk to 18.2% during 9mFY12, from 19.1% in 9mFY11. This was on account of the rise in power purchase costs. The company also recorded a rise in its other expenses, due to higher coal mining and selling and distribution costs.

  • The gain on forex at Rs 2.7 bn in 9mFY12 as compared to Rs 58 m in 9mFY11 was due to impact of AS11 accounting policy due to which losses on long term forex liabilities were capitalized and amortised in P&L over the tenor of the liability.

  • Tata Power plans to transfer at least 75% of the ownership of the investments in the coal companies in Indonesia to its subsidiary Coastal Gujarat Power Ltd (CGPL) to 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. Hence it has not made provisions for diminution in value of investments in the standalone accounts.

What to expect?
At the current price of Rs 109, the stock is trading at a multiple of 1.4 times our estimated FY14 book value. Given the timely execution of projects and better visibility on the revenue front we believe that the company will remain at the forefront of power capacity addition in the country. However, the overall concerns over securing fuel supplies at reasonable costs that are clouding the sector prospects cannot be sidelined. Apart from its power generation plans, Tata Power is also progressing steadily in other related areas like power distribution, trading, and coal mining. At the current valuations we maintain our positive view on the stock from a 2-3 years perspective.

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