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Tata Power: Higher taxes impact profits - Views on News from Equitymaster

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Tata Power: Higher taxes impact profits

May 29, 2009

Performance summary
  • Standalone and consolidated sales grow by 22% YoY and 61% YoY respectively during FY09. Growth for the standalone business mainly aided by improvement in realisation as volume sales decline by 2% YoY. Consolidated sales include numbers from the Indonesian coal mines (sales up 125% YoY), which were not part of the company for entire of FY08.
  • Standalone operating margins contract by 0.5% YoY during the fiscal on the back of higher fuel costs (as percentage of sales).
  • Net profits, on a standalone basis, grow by 6% YoY. On a consolidated basis, profits are up by 10% YoY.

Financial performance snapshot
  Standalone Consolidated
(Rs m) FY08 FY09 Change FY08 FY09 Change
Net sales 57,973 70,715 22.0% 108,456 175,051 61.4%
Expenditure 49,855 61,173 22.7% 88,023 140,420 59.5%
Operating profit (EBDITA) 8,118 9,543 17.6% 20,433 34,631 69.5%
Operating profit margin (%) 14.0% 13.5%   18.8% 19.8%  
Other income 6,164 7,971 29.3% 5,682 6,464 13.8%
Interest 1,676 3,058 82.5% 4,988 7,087 42.1%
Depreciation 2,905 3,289 13.2% 5,593 9,369 67.5%
Profit before tax 9,701 11,167 15.1% 15,534 24,638 58.6%
Tax 1,002 1,945 94.1% 3,765 11,651 209.5%
Profit after tax/(loss) 8,699 9,222 6.0% 11,770 12,987 10.3%
Net profit margin (%) 15.0% 13.0%   10.9% 7.4%  
No. of shares 220.7 221.4   220.7 221.4  
Diluted earnings per share (Rs)*   41.6     58.6  
P/E ratio (x)*         18.5  
* On a trailing 12-months basis

What has driven performance in FY09?
  • Tata Power grew its standalone sales by 22% YoY during FY09. The company largely benefited from higher realisation, which at an average of Rs 4.8 per unit was 24% YoY higher than the Rs 3.9 per unit rate earned in FY08. The growth in sales could however have been better but for a 1.7% YoY decline in volume sales on the back of almost flat performance in terms of power generation. The company generated 14,807 m units of power in FY09, up by 0.6% YoY.

    Segment wise sales (Consolidated)
      FY08 FY09 Change
    Revenue (Rs m) 84,234 119,121 41.4%
    % of total revenue 77.3% 67.7%  
    PBIT margins 14.3% 11.7%  
    Coal (Indonesian mines)      
    Revenue (Rs m) 21,220 47,766 125.1%
    % of total revenue 19.5% 27.2%  
    PBIT margins 18.5% 30.6%  
    Revenue (Rs m) 3,454 8,989 160.2%
    % of total revenue 3.2% 5.1%  
    PBIT margins 8.7% -1.1%  
    * ‘Others' includes defense electronics, solar equipments, projects,
    coal bed methane and property development

  • Tata Power’s standalone operating margins declined by 0.5% YoY during FY09. This was on account of the rise in fuel costs. As percentage of sales, these costs increased from 64.1% in FY08 to 68.1% in FY09. Decline in staff costs and cost of power purchased (both as percentage of sales) though pared some pressure off the margins during the fiscal.

  • Tata Power’s standalone net profits grew by a marginal 6% YoY during FY09 as c0mpared to the 22% YoY growth in sales. A substantial increase in tax expenses (up 94% YoY) led to the pressure on the bottomline during the year. Effective tax rate jumped from 10.3% in FY08 to 17.4% in FY09.

What to expect?
At the current price of Rs 1,085, the stock is trading at a multiple of 2.2 times our estimated FY11 book value for the company. Tata Power’s FY09 performance has come in better than our estimates and as such we would have to revise our forward estimates upwards. The management has indicated that all its power generation projects (Mundra UMPP, Maithon, Jojobera and Trombay) are running as per schedule and that it has organised loans for each of them. The first unit of the Mundra UMPP is likely to be commissioned by September 2011. In order to strengthen its renewable energy portfolio, Tata Power recently acquired an 11% stake in Geodynamics Limited, Australia, which specialises in geothermal energy. We had recommended a ‘Hold’ on the stock in January 2009 and the target price has already been breached. Given this, we now have a cautious outlook on the stock.

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