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Tata Power: Some respite, but not enough - Views on News from Equitymaster

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Tata Power: Some respite, but not enough
Jun 5, 2013

Tata Power declared its results for the quarter and year ended March 2013. While the company's standalone revenues increased by 13% YoY, its profits declined by about 12% YoY. Here is our analysis of the results

Performance summary
  • Standalone revenues grow by 13% YoY during FY13.
  • Standalone operating profits rise at a faster pace of 15% YoY as margins expand by 0.4% YoY to 20.4% during FY13. Margins expand mainly due to lower costs of power purchased (as a percentage of sales).
  • Lower other income, coupled with higher interest costs and tax costs lead to a decline in net profits to the tune of 12% YoY.
  • During 4QFY13, standalone revenues decline by 7% YoY while profits rise by 71% YoY. The profit numbers are however highly influenced by the change in depreciation rates leading to write back during the quarter, thereby also paying out higher taxes.
  • On consolidated basis, the company's revenues increased 27% YoY during FY13. While losses reduced to Rs 854 m from Rs 10.9 bn last year.
  • The company's board has recommended a dividend of Rs 1.15 per share (dividend yield of about 1.3%) for the year ended March 31, 2013.

Standalone financial performance
(Rs m) 4QFY12 4QFY13 Change FY12 FY13 Change
Generation 3,599 3,366 -6.5% 15,230 15,770 3.5%
Sales 3,593 3,542 -1.4% 15,240 16,002 5.0%
Net revenue 23,747 22,143 -6.8% 84,958 95,673 12.6%
Expenditure 19,304 16,350 -15.3% 67,112 75,156 12.0%
Operating profit (EBDITA) 4,443 5,793 30.4% 17,846 20,517 15.0%
EBDITA margin (%) 18.7% 26.2%   21.0% 21.4%  
Other income 1,056 1,499 41.9% 8,874 7,217 -18.7%
Depreciation 1,508 (744)   5,704 3,641 -36.2%
Interest 1,388 1,965 41.6% 5,149 6,783 31.7%
Gain/ (Loss) on exchange (1,125) (295)   961 (276)  
Profit before tax 1,478 5,776 290.8% 16,829 17,034 1.2%
Tax 308 3,776 1125.0% 5,131 6,787 32.3%
Effective tax rate 21% 65%   30% 40%  
Profit after tax/(loss) 1,170 2,000 71.0% 11,697 10,247 -12.4%
Net profit margin (%) 4.9% 9.0%   13.8% 10.7%  
No. of shares (m)         2,373.1  
Diluted earnings per share (Rs)*         4.3  
Price to earnings ratio (x)         20.9  
*On a trailing 12-month basis

What has driven performance in FY13?
  • Tata Power's standalone generation and volumes increased by 3.5% YoY and 5% YoY respectively during FY13. The company's revenues increased at a faster pace largely led by the company's Mumbai power business as well as a favourable ATE order. Further, lower other income (on account of lower dividends from coal companies), higher finance charges and exchange losses led to a marginal 1% YoY increase in profit before taxes. Further, a higher tax outgo on account of change in earlier depreciation rates also impacted the profits leading to a decline of 12% YoY.

  • On segmental basis, revenues from the power segment were up 44% YoY; those from the coal segment were down by 2% YoY in FY13. EBIT margins for the power segment went up at 15.5% in FY13 from 13.4% in FY12. For the coal business, margins for the year came inat 11.4% as compared to 21.6% in FY12. The coal business was impacted by the lower realizations as compared to the previous year.

What to expect?
At the current price of Rs 89.5, the stock is trading at a multiple of about 1.2 times our estimated FY15 book value per share.

As put by the company's management, it is eagerly awaiting finalization of the compensatory tariff for its Mundra UMPP, which got fully commissioned during the year ended FY13. As per the management, it is considering expanding capacities at the plant by 1,600 MW. However, power from these units would be sold at tariffs different from what is being generated at the 4,000 MW plant. However, it also added that the company will continue to grow and look at new opportunities, but will plan it in a manner where there is no immediate large amount of cash outgo and there is no large commitment. This is the case as looks to support the new plant. During the year, losses from this business stood at Rs 16 bn.

As such a lot depends on the outcome of the decision by the CERC. Otherwise, we believe that all the negatives have been priced into the stock's valuations and any positive developments here on would only add to upside. Given the strong moat that the company possesses as the largest private power producer and a probable turnaround in the UMPP business over the medium term, we believe Tata Power's consolidated return ratios will see significant upsides as well. Hence, we believe investors should hold on to their current positions and not purchase any more shares of the company.

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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