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Tata Power: Nothing exciting on the cards... - Views on News from Equitymaster
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Tata Power: Nothing exciting on the cards...
May 28, 2015

Tata Power declared its results for the quarter and year ended March 2015. The company's standalone revenues grew by 19% YoY, while profits were up by 154% YoY during the quarter. Here is our analysis of the results.

Performance summary
  • Generation and sales volumes decline by about 3% and 4% respectively. Revenues nevertheless rise by 19% YoY led by higher fuel costs and operational efficiencies.
  • Operating profits increase in line with revenue growth. Net profits rise by more than 1.5 times due to a benign increase in interest and depreciation charges coupled with forex losses in the current quarter.
  • During FY15, standalone revenues remain flat, while profits rise by 6%.
  • During 4QFY15, consolidated revenues decline by 7% YoY while profits before tax rise by 69% YoY.
  • During FY15, while consolidated revenues decline by 4% YoY, profits before tax move up by 52% YoY.
  • Board declares dividend of Rs 1.3 per share for the year, translating to a yield of about 1.73%.

Standalone financial performance
(Rs m) 4QFY14 4QFY15 Change FY14 FY15 Change
Generation 2,670 2,596 -2.8% 13,183 11,974 -9.2%
Sales 3,071 2,956 -3.7% 14,516 13,603 -6.3%
Net revenue 18,249 21,649 18.6% 86,755 86,777 0.0%
Expenditure 13,277 15,779 18.8% 61,212 65,157 6.4%
Operating profit (EBDITA) 4,973 5,870 18.1% 25,543 21,620 -15.4%
EBDITA margin (%) 27.2% 27.1%   29.4% 24.9%  
Other income 2,250 2,532 12.6% 6,558 10,247 56.3%
Depreciation 1,631 1,585 -2.8% 5,871 5,753 -2.0%
Interest 2,547 2,664 4.6% 8,682 10,475 20.6%
Gain/ (Loss) on exchange (496)  (70)   (2,635) (483) -81.7%
Profit before tax 2,548 4,084 60.3% 14,912 15,157 1.6%
Tax 1,706 1,950 14.3% 5,371 5,054 -5.9%
Effective tax rate 67% 48%   36% 33%  
Profit after tax/(loss)  842 2,134 153.5% 9,541 10,103 5.9%
Net profit margin (%) 4.6% 9.9%   11.0% 11.6%  
No. of shares (m)       2,704.6 2,704.6  
Diluted earnings per share (Rs)*         3.6  
Price to earnings ratio (x)         21.1  
*On a trailing 12-month basis

What has driven performance in 4QFY15?
  • Tata Power's standalone revenues were up by 19% YoY led by higher fuel cost and better operational performance at company's Mumbai operations. Higher revenues from the company's SED division also contributed to the growth. Further, stable margins coupled with higher other income (due to dividend from subsidiaries), lower forex losses as well as lower interest and depreciation charges led to a sharp rise in profits before tax. Tax charges remain volatile due to deferred tax charges.

  • Tata Power's consolidated revenues fell by 7% YoY during the quarter led by a 22% YoY decline in revenues from the coal division. Growth in the power division was subdued due to lower revenues from the Trombay division. Operating profits came in higher by 18% YoY, on the back of lower fuel prices at the Mundra UMPP (including lower fuel prices and higher fixed cost recovery due to better availability), and higher contribution from the Mumbai operations. The profits before tax were higher by about 69% YoY on the back of a better operating performance coupled with lower depreciation charges.
What to expect?
At the current price of Rs 75, the stock is trading at a multiple of about 1.6 times its FY15 book value per share.

As compared to the preceding quarter, the performance of the company's coal division did improve substantially as the management took some strong cost cutting measures. EBIT margins of this division nevertheless crashed by 43% YoY to 11.3% during the quarter as the decline in price was way more than the cost cutting efforts. However, margins for the full year remained stable at about 11.4% levels.

Over the next few years, the company plans to focus on setting up capacities internationally across all fuel types, while in India the focus will largely be on the renewable space. Key reason for this approach is the red tapism which leads to massive delays in projects, something which is not experienced abroad.

Some of the key factors to watch out for are the clarity on the enforceability of the compensatory tariffs which are currently stuck in legal disputes and the divestment in the Arutmin stake (US$ 500 m), the value of which has not seemingly been revised despite the fall in prices.

We maintain our negative view on the stock given the many uncertainties and the not so clear visibility in growth. Investors would be better off exploring more certain opportunities in other sectors.

We would like to remind our subscribers that for the purpose of risk minimisation, one should avoid having more than 5% exposure on any one stock from the overall equity portfolio. Please do visit our asset allocation section for further details.

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