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Tata Power: Mundra UMPP casts shadow

Jun 13, 2012

Tata Power has declared the results for the fourth quarter of financial year 2011-12 (4QFY12). The company has reported 34% YoY growth in standalone net revenues while net profit has fallen by 56% YoY. Here is our analysis of the results.

Performance summary
  • Standalone revenues grow by 22% YoY during FY12, largely due to higher generation of hydro power and increase in wind power capacity.
  • Standalone operating margins drop to 16.6% in FY12, from 19.2% in 2QFY11 due to higher cost of power purchased as well as higher cost of fuel (as a percentage of sales).
  • Thanks to higher other income (income from investments, dividends forex gains), net profits for the full year period grew by 24% despite lower operating margins.
  • Losses escalate for Coastal Gujarat Power Ltd (CGPL), the subsidiary building the Mundra plant, due to higher operating cost and freight charges.

Standalone financial performance
(Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
Generation 3,531 3,599 1.9% 15,325 15,230 -0.6%
Sales 3,777 3,593 -4.9% 16,060 15,240 -5.1%
Net revenue 16,302 21,840 34.0% 65,993 80,515 22.0%
Expenditure 13,387 19,104 42.7% 53,303 67,112 25.9%
Operating profit (EBDITA) 2,915 2,736 -6.1% 12,690 13,403 5.6%
EBDITA margin (%) 17.9% 12.5%   19.2% 16.6%  
Other income 2,196 1,637 -25.5% 8,126 14,276 75.7%
Depreciation 1,220 1,508 23.6% 5,101 5,703 11.8%
Interest 1,318 1,388 5.3% 4,598 5,148 12.0%
Profit before tax 2,573 1,477 -42.6% 11,117 16,828 51.4%
Tax (103) 308 -399.0% 1,703 5,131 201.3%
Effective tax rate -4% 21%   15% 30%  
Profit after tax/(loss) 2,676 1,169 -56.3% 9,414 11,697 24.3%
Net profit margin (%) 16.4% 5.4%   14.3% 14.5%  
No. of shares (m)         2,373.3  
Diluted earnings per share (Rs)*         4.5  
Price to earnings ratio (x)         21.6  
* On a trailing 12 months basis

What has driven performance in 4QFY12?
  • Tata Power’s generation remained almost flat in FY12 while net sales dropped by 5% YoY in volume terms. The growth in sales revenue from the power business declined on account of lower realisation per unit on the company's merchant sales. Total generation of power for FY12 was down due to lower generation in Mumbai. Sales outside Mumbai were lower by 4% YoY mainly due to lower sales in Jojobera due to lower demand from Tata Steel.

  • The distribution subsidiary and Joint-Venture with Delhi government, Tata Power Delhi Distribution (TPDDL) saw 20% drop in profits in FY12 despite the regulator having hiked tariffs effective September 2011, mainly due to expenses incurred on repairs of transformers.

  • The first unit of its Mundra-based ultra mega power project (UMPP) of 800 MW, which commenced commercial operations in the March quarter, reported a loss. To curb losses, the company has commenced trials of blending low-grade coal, and initial reports suggest blending up to 50% is feasible. This should help keep a check on losses. The second unit of Maithon and Mundra are expected to be commissioned in the June and September quarters and should add to top line. Together these will add 5,050 MW of capacity out of which power purchase agreements have already been signed for 4,850 MW.

  • As for the company's coal mining business, net profits grew by 261% YoY during the financial year. This was on the back of better higher dividends realized. In order to support the cash flows of Mundra UMPP, Tata Power plans to transfer to it at least 75% of its equity interest in the Indonesian coal units to its subsidiary Coastal Gujarat Power Ltd (CGPL). This will protect the standalone business from the risk of price volatility on coal to be used in power generation, to the extent not covered by price escalations and to support its cash flows. Hence it has not made provisions for diminution in value of investments in the standalone accounts.

  • Tata Power's standalone operating margins shrunk to 16.6% during FY12, from 19.2% in FY11. This was on account of the rise in power purchase costs. The company also recorded a rise in its other expenses, due to higher coal mining and selling and distribution costs.

What to expect?
At the current price of Rs 98, the stock is trading at a multiple of 1.3 times our estimated FY14 book value. The long term visibility of the regulated business model, low exposure to volatile merchant power and robust prospects of coal mining business are positives for Tata Power. However, the overall concerns over securing fuel supplies at reasonable costs that are clouding the sector prospects cannot be sidelined. We also have a cautious stance on the company due to lack of clarity over the breakeven of Mundra UMPP and slow ramp-up in production at its Indonesia mines. At the current valuations we maintain our positive view on the stock from a 3 years perspective.

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