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Tata Power: Fused performance!

May 31, 2005

Performance Summary
Private sector power major, Tata Power (TPC), has reported poor results for the year ended March 2005. On a consolidated basis, while revenues have declined by 2% for the fiscal, net profits have grown by 17% YoY, mainly on account of a spike in other income and reduced interest costs. Operating margins have contracted by 420 basis points.

Consolidated financial performance
(Rs m) FY04 FY05 Change
Sales 50,148 49,054 -2.2%
Expenditure 35,743 37,031 3.6%
Operating profit (EBDITA) 14,405 12,022 -16.5%
Operating profit margin (%) 28.7% 24.5%  
Other income 1,700 3,649 114.7%
Interest 2,905 2,068 -28.8%
Depreciation 4,295 4,754 10.7%
Profit before tax 8,905 8,849 -0.6%
Extraordinary income/(expense) (951) (300)  
Minority Interest 5 -  
Share of (profit) / loss of associates 400 (31)  
Tax 2,526 2,710 7.3%
Profit after tax/(loss) 5,024 5,870 16.8%
Net profit margin (%) 10.0% 12.0%  
No. of shares 197.9 197.9  
Diluted earnings per share* (Rs) 25.4 29.7  
P/E ratio (x)   12.8  
(* annualised)      

The company's performance on a standalone basis paints an equally poor picture. While revenues for the fiscal have declined by 7%, net profits have grown by 8% YoY, reasons being the same as mentioned above. A lower extraordinary expense has also propped up the bottomline for both the fourth quarter and the fiscal. Operating margins have contracted by 11.2% and 6.2% in 4QFY05 and FY05 respectively.

Standalone financial performance
(Rs m) 4QFY04 4QFY05 Change FY04 FY05 Change
Sales 10,391 9,623 -7.4% 42,391 39,304 -7.3%
Expenditure 7,531 8,054 6.9% 29,521 29,777 0.9%
Operating profit (EBDITA) 2,860 1,569 -45.1% 12,870 9,527 -26.0%
Operating profit margin (%) 27.5% 16.3%   30.4% 24.2%  
Other income 490 1,921 292.2% 1,600 3,871 142.0%
Interest 871 401 -54.0% 2,837 1,914 -32.5%
Depreciation 844 1,029 21.9% 3,340 3,596 7.7%
Profit before tax 1,634 2,060 26.0% 8,294 7,888 -4.9%
Extraordinary income/(expense) (766) (300)   (951) (300)  
Tax 325 55 -83.2% 2,252 2,074 -7.9%
Profit after tax/(loss) 544 1,706 213.8% 5,091 5,514 8.3%
Net profit margin (%) 5.2% 17.7%   12.0% 14.0%  
No. of shares 197.9 197.9   197.9 197.9  
Diluted earnings per share* (Rs) 11.0 34.5   25.7 27.9  
P/E ratio (x)         13.6  
(* annualised)            

What is the company's business?
TPC is the largest private player in the power sector with a generation capacity of 2,203 MW, which is around 18% of the total power generation capacity of the private sector in India. Out of this installed capacity, around 79% is used for supplying electricity to the Mumbai region. Power business contributes to around 94% of TPC's revenues and 98% of PBIT. Apart from power generation, the company also has interest in areas like transmission and distribution, broadband and communication.

What has driven performance in FY05?
Power business - the culprit: The 9% YoY decline in revenues from TPC's power business (94% of revenues) has been the reason for the company's poor topline performance in this quarter. However, it must be noted that this decline in revenues from the segment is despite a 3.5% YoY increase in volume sales, and is a result of the 11.6% reduction in tariff. On the generation front, TPC witnessed a 2.8% YoY growth and this was a result of improved PLF (plant load factor, or capacity utilisation) at its Trombay (81.6%) and Jojobera (72.4%) power stations. The other businesses of the company, viz. electronics, broadband services and project consultancy, have however witnessed a 30% YoY growth in revenues. It must be noted here that the company board has authorized the sale of the broadband business.

Segment-wise performance…
  FY04 % of total FY05 % of total Change
Power Business
Revenue 40,429 95.3% 36,831 93.5% -8.9%
PBIT 8,582 98.1% 6,169 98.3%  
PBIT margin 21.2%   16.7%    
Others
Revenue 1,988 4.7% 2,579 6.5% 29.7%
PBIT 168 1.9% 109 1.7% -35.3%
PBIT margin 8.4%   4.2%    
Total*
Revenue 42,418   39,410   -7.1%
PBIT 8,750   6,277   -28.3%
PBIT margin 20.6%   15.9%    
* Excluding inter-segment adjustments

Higher fuel costs dent margins: Apart from the effect of a poor topline performance, the rise in fuel costs (as percentage of sales) has also added to margin pressure for TPC in the quarter and full-year. Fuel costs rose to 47.4% of FY05 sales from 43.6% of sales in FY04. Another important element of costs, i.e., cost of power purchased, has increased from 9.7% of sales in FY04 to 10.6% in the latest fiscal. Based on segments, and as indicated in the table above, while power business profit margins have declined by 450 basis points, those for its other businesses are down 420 basis points.

Other income props bottomline: Despite a poor performance on the topline front and sharp contraction in margins, TPC has seen growth in its bottomline for both 4QFY05 and FY05. This has chiefly been a result of a strong spike in the other income component and reduced interest costs. During 4QFY05, TPC sold off its investment in Tata Petrodyne for a consideration of Rs 1,810 m and this is being reflected in the other income for the quarter and fiscal. FY05 other income also includes a sum of Rs 389 m on account of profit from sale of the 75 MW Wadi plant, which was reported in 3QFY05.

Performance in the recent past…
  1QFY05 2QFY05 3QFY05 4QFY05
Sales growth (YoY, %) 0.5 (11.4) (11.0) (7.4)
Profits growth (YoY, %) 2.2 (17.1) (25.6) 213.8
Operating margins (%) 32.4 23.4 23.8 16.3

What to expect?
At the current price of Rs 380, the stock is trading at a price to earnings multiple of 12.8 times consolidated FY05 earnings. The company has recommended a final dividend of Rs 7.5 per share (dividend yield of 2%). The company plans to add 1,500 MW of generating capacity over the next five years, which amounts to around 66% of the current capacity. TPC is also in the process of shifting its focus from being a Mumbai centric player to having a national presence. Towards these initiatives, the company has raised Rs 6 bn in the domestic market through private placement of debentures and has completed a US$ 200 m, 5-year FCCB issue.

During FY05, while TPC has underperformed our revenue projections by 8%, it has been able to match our EPS guidance of Rs 27.2 per share (on a standalone basis). We will soon update our subscribers with respect to our detailed view on the stock post a research meeting with the management.

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