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Tata Power: Lower volumes dampen margins - Views on News from Equitymaster

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Tata Power: Lower volumes dampen margins
May 19, 2011

Tata Power has declared the results for financial year 2011 (FY11). The company has reported 4% YoY decline in standalone net revenues while net profit has remained flat YoY. Here is our analysis of the results.

Performance summary
  • Standalone revenues fall by 4% YoY during FY11, largely due to a decline in sales of the power business.
  • Standalone operating margins drop to 19% in FY11, from 24% in FY10 due to higher cost of power purchased (as a percentage of sales).
  • Despite higher other income (income from investments), net profits for the fiscal remained flat YoY due to the lower operating margins. Lower tax outgo also cushioned profits.
  • Board has recommended stock split in the ratio of 10:1 and dividend of Rs 12.5 per share (dividend yield 1%).


Standalone financial performance
(Rs m) FY10 FY11 Change
Net revenue 68,934 65,994 -4.3%
Expenditure 52,360 53,727 2.6%
Operating profit (EBDITA) 16,574 12,267 -26.0%
EBDITA margin (%) 24.0% 18.6%  
Other income 4,861 8,128 67.2%
Depreciation 4,779 5,101 6.7%
Interest 4,066 4,168 2.5%
Profit before tax 12,590 11,126 -11.6%
Tax 3,205 1,708 -46.7%
Effective tax rate 25% 15%  
Profit after tax/(loss) 9,385 9,418 0.4%
Net profit margin (%) 13.6% 14.3%  
No. of shares (m)   237.3  
Diluted earnings per share (Rs)*   39.6  
Price to earnings ratio (x)   30.7  
(*On a trailing 12-month basis)

What has driven performance in FY11?
  • Tata Power saw nearly a 4% YoY decline in its consolidated net sales during the quarter. Sales from the power business declined by 3% YoY. This was a result of lower realisation per unit on the company's merchant sales and was despite the fact that total volume sales of electricity increased by 3% YoY during the fiscal. Total generation of power for the year was down 4% YoYfor the fiscal, particularly due to 6% lower YoY generation in Mumbai due to cheaper power being available through purchases. Cost of power purchases was 12% of net revenues in FY11 as against 4% of revenues in FY10.

  • As for the company's coal mining business, net revenue grew by 14% YoY during the financial year. This was on the back of better realisations even as the company sold lesser coal during the quarter as compared to its volume sales in FY10.

  • Tata Power's standalone operating margins shrunk to 18.6% during FY11, from 24.0% in FY10. 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.

  • Standalone net profits remained flat YoY while consolidated net profits grew by 2% YoY during FY11, largely as a result of the drop in operating margins despite higher other income. This rise in other income was due to a higher forex gain recorded during the fiscal.

  • The retail customer base crossed 1.6 lakh in March 2011.

  • While the Mundra UMPP project was 80% completed, the Maithon project was 95% completed by FY11. Both are scheduled to become operational by FY12-FY13 adding 5,050 MW of capacity out of which power purchase agreements have already been signed for 4,850 MW of capacities.

What to expect?
At the current price of Rs 1,215, the stock is trading at a multiple of 1.6 times our estimated FY13 book value. The company has marginally outperformed our estimates both on the topline and bottomline front for FY11. 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. Apart from its power generation plans, Tata Power is also progressing steadily in other related areas like power distribution, trading, and coal mining. We maintain our positive view on the stock from a 2-3 years perspective.

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