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Tata Power: Consumer rebate hits hard

May 31, 2007

Performance summary
  • FY07 standalone sales up 4% YoY, PAT grew by 14% YoY.

  • 4QFY07 sales, profit after tax declined by 17% YoY and 33% YoY respectively, largely on account of impact of rebate to consumers

  • Consolidated topline grew by 15% YoY in FY07, 3% higher than our estimates.

  • FY07 operating margins contracted by 3.1%, largely owing to higher fuel costs (as percentage of sales), cost of power purchase also showed an increase.

  • Board recommended dividend of Rs 9.5 per share (dividend yield of 1.6%)

Standalone financial performance: A snapshot
  Standalone Consolidated
(Rs m) 4QFY06 4QFY07 Change FY06 FY07 Change FY06 FY07 Change
Sales 11,638 9,474 -18.6% 45,342 47,153 4.0% 56,403 64,773 14.8%
Expenditure 10,065 9,424 -6.4% 36,987 39,919 7.9% 46,384 53,862 16.1%
Operating profit (EBDITA) 1,573 51 -96.8% 8,355 7,234 -13.4% 10,019 10,911 8.9%
Operating profit margin (%) 13.5% 0.5%   18.4% 15.3%   17.8% 16.8%  
Other income 754 1,787 136.9% 3,256 3,440 5.6% 2,982 2,671 -10.4%
Interest 420 473 12.6% 1,653 1,895 14.7% 1,807 2,833 56.8%
Depreciation 734 693 -5.6% 2,783 2,919 4.9% 3,457 4,148 20.0%
Profit before tax 1,173 672 -42.7% 7,175 5,860 -18.3% 7,737 6,601 -14.7%
Extraordinary income (expenditure) 300 -   300 -   300 -  
Share of profit/(loss) of associates - -   - -   1,102 195  
Minority interest - -   - -   (2) 189  
Tax 85 (255)   1,369 (1,108)   1,687 (991)  
Profit after tax/(loss) 1,388 927 -33.2% 6,105 6,968 14.1% 7,454 7,598 1.9%
Net profit margin (%) 11.9% 9.8%   13.5% 14.8%   13.2% 11.7%  
No. of shares               197.9  
Diluted earnings per share (Rs)               38.4  
P/E ratio (x)               15.1  

What is the company’s business?
Tata Power (TPC) is the largest private player in the power sector with a generation capacity of 2,324 MW, which is around 19% of the total power generation capacity of the private sector in India and a mere 2% of the country’s total capacity. Out of this installed capacity, around 80% is used for supplying electricity to the Mumbai region. Apart from power generation, the company also has interests in areas like transmission and distribution and power trading.

What has driven performance in FY07?
Customer rebates suppress topline: Tata Power recorded a marginal 4% YoY growth in topline during FY07. While the company’s volume sales increased by 6% YoY growth and its realisations (tariff per unit sold) improved by 2% YoY, the pressure on topline was inflicted by the Rs 2.2 bn rebate that the company provided to its consumers during 4QFY07. As reported in the company’s press release, during the fourth quarter, it recognised a net surplus (excess of company’s aggregate gains over return on equity entitlement) of Rs 2.2 bn, largely on account of a reversal of tax provision of Rs 1.8 bn made in earlier years. As per the regulations, Tata Power has passed on this surplus to its consumers by way of an equal amount of rebate in 4QFY07 and FY07, thus putting pressure on its topline and bottomline during both these periods. However, the company has indicated that this debit (of rebate) from revenues will be incorporated by the regulator in the future tariff order. If one were to take into account the company’s topline without adjusting for this rebate, then the same (topline) has grown by 8% YoY during FY07.

Tata Power’s generation of power grew by 4% YoY during the fiscal, led by highest ever generation at its Jojobera plant (Jharkhand) and hydro stations (Maharashtra). During 4QFY07, the company commissioned a 45 MW wind project in Maharashtra.

The company is currently working on a 250 MW coal based unit at Trombay (Trombay’s current capacity is 1,330 MW). This expanded capacity is expected to get commissioned in FY09 and will cater to increasing energy requirements in the Mumbai region. The company is also in process of setting up 100 MW of diesel generating sets, also to cater to demand in Mumbai. Also, during the quarter, Tata Power entered into a deal to acquire 30% stake in two major Indonesian thermal coal producers, PT Kaltim Prima Coal and PT Arutmin Indonesia, as well as related trading companies owned by PT Bumi Resources for a consideration of US$ 1.1 bn. As per the management, the acquisition specifically addresses fuel requirements for Mundra ultra-mega power project (UMPP), Trombay and the coastal power project in Maharashtra.

Also, towards the Mundra UMPP, the company has signed a equipment (boiler) supply contract with the Korean Doosan Heavy Industries & Construction Co. Ltd. As a matter of fact, the contract covers 45% of the total ordering that Tata Power has to do under this project. In order to finance these expansion projects, Tata Power plans to make a preferential issue of equity shares and warrants to Tata Sons. These issues will dilute the company’s current capital base by around 10% and will help it raise around Rs 12 bn in FY08 and FY09.

Purchases and fuel are getting expensive: Tata Power’s operating margins were impacted on account of a significant increase in fuel costs as also costs on power purchase. The company’s fuel costs increased from 52.9% of sales in FY06 to 57.4% of sales in FY07. On the other hand, power purchase costs expanded from 12.9% of sales to 14% of sales. But for the decline in other expenditure, the pressure on operating margins would have been greater.

Tax reversals save the bottomline: During 4QFY07, Tata Power reported reversal of tax provision of Rs 1.8 bn made in earlier years (as described above), which helped it to reduce the pressure on net profits that managed a growth of 14% YoY during FY07, while declining by 33% YoY during 4QFY07.

What to expect?
At the current price of Rs 580, the stock is trading at a multiple of 1.8 times our estimated FY09 book value for the company. The winning of the Mundra UMPP in 3QFY07 and acquisition of Indonesian mines towards securing fuel supplies for the same is a long-term positive for the company. Timely execution of the ongoing projects will also add significant value to its growth in the future. However, we remain concerned about the general rise in raw material costs, which continue to pare the company’s profitability levels. We maintain our positive recommendation on the stock from a 2-3 years perspective.

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