When the bourses fell post budget Tata Power was amongst the worst hit. From a high of Rs 172 it fell to Rs 92, finally recovering to Rs 123 yesterday. So, is it evenly valued or not?
In the past one year, Tata Power has been on a restructuring spree. The merging of the three Tata Electric Company into one single company as Tata Power, the announcement that Tata Power will be the Tata Group’s vehicle for foray into communications, the hiking of stake in the 1,000 MW Mangalore Power Company to 50%, the transfer of the oil exploration unit of Tata Petrodyne to Tata Power, all these moves had led to a re-rating of the Tata Power stock on the bourses.
The recent positives from the budget should also encourage Tata Power’s fortunes. There was a lot of stress by the finance minister on development of roads for rural sector. He gave out Rs 7.5 bn for rural electrification, which is very positive. There is a higher outlay for the power sector in this budget, indicating that the government wants to upgrade, renovate and spend on maintenance of government owned state electricity boards (SEBs). It will improve the plant load factor of government owned power stations. If the SEBs improve, the investments in the power sector will definitely rise.
The company also stands to benefit from the amendments u/s 80 IA, which deals with the depreciation norms for infrastructure companies. The budget extended the benefit of these norms for power transmission and distribution from 2003 to 2006. Another amendment u/s 80 IA is that now power companies can write off depreciation for new plants over an entire block of 10 years. Earlier the benefit was only available till the first five years of the project. This meant that companies wrote off depreciation in the first five years itself, and normally ended up in losses and then did not pay tax. The benefits of extension of 80 IA till 2006 will accrue to Tata Power, especially to the new power plants being set up in Belgaum, Jojobera and Wadi.
Another important positive for Tata Power was the extension of the 80 IA benefit for the telecommunications sector, which was not available earlier. It was stopped from the year 2000 onwards. But in this budget it has been given a retrospective effect upto 2003. This is very beneficial for new telecom companies, which have set up operations from 2001 onwards. The extension of section 80 IA benefits to telecommunications will help Tata Power, considering its bandwidth and telecommunication plans.
When we spoke to Tata Power’s Senior GM, Mr. R K Kanga post-budget, he stated that reduction in the corporate and the dividend taxes will not really benefit the shareholders directly but the benefits will be passed onto customers in the form of lower tariffs. He stated that Tata Power has worked out that the combined benefit of lower dividend and corporate tax will result in a reduction of tariff by almost 5 to 6 paise for the consumers.
The reduction of countervailing duty on LNG from 16% to 0 is also a positive for Tata Power considering its LNG foray.
At Rs 123, the Tata Power stock trades at 5.5 times its FY01E earnings. Given the government’s resolve to push through power sector reforms, Tata Power is sure to play a leading role in the power and telecom infrastructure development in the country, thus making it an good bet on the infrastructure development of the country.