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Tata Power: Telecom woes - Views on News from Equitymaster
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  • May 18, 2002

    Tata Power: Telecom woes

    One of India’s largest private sector power producers, Tata Power, is slowly changing the sphere of its activities. Since FY01, the company has continued to be in the thick of things. First came merging of the three power companies as one, then the chairman, Mr. Ratan Tata’s statement that Tata Power would be the group’s vehicle for its communication foray. The proposed LNG foray, buying out Tata Petrodyne and taking over the transmission business of Tata International followed later. Not to mention being one of the prominent partners in the Tata Group’s successful bid for the country’s largest ISP, VSNL.

    The merging of the three companies gave it a bigger base on paper, but the three companies were anyway functioning as one earlier. But it sure did manage to catch the market’s attention. The telecom and broadband foray were also welcomed, as globally power companies follow the same model. On the back of this, the stock price zoomed from the Rs 50 levels to Rs 170. But then it couldn’t stay there for long. The reason. As the TMT euphoria died down, people began to question what kind of revenues the broadband plan would generate.

    Sources inside the Tata group agree that the broadband venture would take atleast three years to break-even. It may very well exceed that. The strategy is to become a carrier’s carrier and to target telco’s and call centres as potential customers. But then Reliance is also aiming for that. Industry analysts agree that in this battle only the fittest would survive. Already the telecom venture is eating into the company’s profits (estimated loss Rs 500 m per annum). Incidentally, the telecom sector globally is facing a huge downturn and competition has meant record low realisations.

    Also, a lot has changed since Mr. Ratan Tata had said that Tata Power would be the group’s communication vehicle. The Tata group has more or less combined its strengths with AT&T, Birla and BPL’s Rajeev Chandrashekar. So it seems that the group’s telecom services interests will be dealt by this entity. The group is also present in telecom hardware in the form of Tata Telecom. There is another internet services company called Tata Teleservices. Therefore, it seems that apart from Tata Power, the group has Tata Telecom and Tata Teleservices, as the other telecom and communication vehicles. So what will be each one’s role? So far, there is no clarity on this yet.

    But one fact that gives credence to the fact that Tata Power will play a significant role in the Tata Group’s telecom strategy is that the company holds a sizeable 40% stake in Panatone Finvest Limited. This company is an unlisted investment arm of the Tata Group, which has acquired 45% stake in VSNL recently. So indirectly, Tata Power has a sizeable stake in VSNL. However, the other 60% in Panatone is more or less held by Tata Sons.

    The worrying part is that though Tata Power is unlikely to have management control over VSNL, it may continue to invest in development of VSNL. It seems that Tata Power has been roped in more for its cash flows than for any other reason.

    The Tata Power management had stated at it analyst meet in June 2001 that it would make definite moves towards LNG by March 2002. However, nothing concrete has happened on this front as yet. Infact, the joint venture with Total Fina and Gail has been dropped.

    The only silver lining for Tata Power is its very own ‘power’ business. The management had targeted to increase its captive power generation (CPP) capacity from 800 MU (million units) to around 2,000 MU by FY03. This plan is on schedule. It has got ready customers such as Tisco, which have started outsourcing their power requirements. Considering the fixed return on capital on which the power business in India operates, this should add to its bottomline progressively. The company also holds 50% stake in 1,000 MW Mangalore Power Company.

    The other good news for Tata Power is the acquisition of Tata Petrodyne. The company earned a net profit of Rs 160 m on revenues of 450 m from the oil business in FY01. By FY06 the management expects the net profit to shoot up to Rs 1,130 m on a revenue base of around Rs 3,000 m. The valuation would reflect the company’s power strengths in times to come. However, telecom investments could continue to be a drain, and we hope for further clarity on this issue. Any progress on the acquisition of Dabhol power plant could also affect the valuation depending on the terms of the deal.



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