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Tata Power: Dull end to a not so bright year - Views on News from Equitymaster
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Tata Power: Dull end to a not so bright year
Jun 13, 2014

Tata Power declared its results for the quarter and year ended March 2014. While the company's standalone revenues declined by 18% YoY during the quarter, its profits dropped by about 57% YoY. Here is our analysis of the results.

Performance summary
  • Standalone revenues decline by 10% YoY, led by a similar decline in sales volumes.
  • Operating profits rise by 24% YoY as margins expand by 8.1% YoY. Margin expansion mainly due to lower fuel costs (as a percentage of sales)
  • Lower other income, coupled with higher interest costs and exchange losses lead to a 7% YoY decline in net profits.
  • During 4QFY14, the company's revenues and profits decline by 18% YoY and 58% YoY respectively.
  • The company's revenues rose by 8% YoY during FY14. Losses expanded to Rs 2.8 bn as compared to Rs 854 m in the previous year.
  • The company's board has recommended a dividend of Rs 1.25 per share (dividend yield of about 1.1%) for the year ended March 31, 2014.

Standalone financial performance
(Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
Generation 3,366 2,670 -20.7% 15,770 13,183 -16.4%
Sales 3,542 3,071 -13.3% 16,002 14,516 -9.3%
Net revenue 22,143 18,121 -18.2% 95,673 86,270 -9.8%
Expenditure 16,330 13,148 -19.5% 75,094 60,728 -19.1%
Operating profit (EBDITA) 5,813 4,973 -14.5% 20,578 25,543 24.1%
EBDITA margin (%) 26.3% 27.4%   21.5% 29.6%  
Other income 1,499 2,250 50.1% 7,217 6,558 -9.1%
Depreciation (744) 1,631   3,641 5,871 61.3%
Interest 1,985 2,547 28.3% 6,783 8,682 28.0%
Gain/ (Loss) on exchange (295) (496)   (276) (2,635)  
Profit before tax 5,776 2,548 -55.9% 17,095 14,912 -12.8%
Tax 3,776 1,706 -54.8% 6,787 5,371 -20.9%
Effective tax rate 65% 67%   40% 36%  
Profit after tax/(loss) 2,000 842 -57.9% 10,309 9,541 -7.4%
Net profit margin (%) 9.0% 4.6%   10.8% 11.1%  
No. of shares (m)       2,373.1 2,704.6  
Diluted earnings per share (Rs)*         3.5  
Price to earnings ratio (x)         30.3  
*On a trailing 12-month basis

What has driven performance in FY14?
  • Tata Power's generation and sales volumes fell by 16% YoY and 9% YoY respectively in FY14. Generation volumes declined due to back down and shutdown of units at the company's Trombay plant. Further, lower demand by Tata Steel coupled with lower PLFs as well as end of power purchase agreements at Belgaum led to lower generation. The company's standalone revenues declined by 10% YoY led by a lower sales volumes. Company's operating profits expanded to 29.6% (from 21.5% in FY13) largely due to lower cost of fuel (due to back down at Trombay plant). Lower other income, coupled with higher depreciation, interest costs (led high higher borrowings and higher hedging costs) as well as higher forex losses (due to realignment of borrowings due to rupee depreciation) impacted the company's performance at the net level.

  • Tata Power's consolidated revenues grew by 8% YoY while it reported a loss of Rs 2.8 bn at the net level. In FY13, the company's losses stood at Rs 854 m. On a segmental basis, revenues from the power segment were up by 8% YoY, while its coal business declined by 6% YoY during the year. EBIT margins for the power segment stood at 14.8% as compared to 13.2% in FY13. EBIT margins for the coal business stood at 11% as compared to 16% last year.
What to expect?
At the current price of Rs 107, the stock is trading at a multiple of about 2.7 times its FY14 book value per share.

Having been granted the compensatory tariff of Rs 0.52 per unit for its Mundra project in the quarter gone by, Tata Power does stand to benefit substantially. However, the company has delayed the same to next year until it receives more clarity on the matter. In addition to this, the company is also allowed by the regulator to receive Rs 3.3 bn for payments of FY13 which are expected to be paid to the company in 36 equal installments for the loss incurred by CGPL in FY13. Also, a sum of Rs 19 bn for the 11 month period ended February 2014 is to be recovered from procurers in a period of one year. The procurers of power from the CGPL project which includes SEBs Gujarat, Maharashtra Rajasthan and Haryana however have approached the Appellate Tribunal for Electricity (APTEL) against the this order. The outcome of this will take time to resolve.

The stock of Tata Power has been very much in favour in the recent past. In the year till date, the stock is up by about 25%, while it has gained by over 38% in the month gone by. However, over the past one year, the stock has underperformed the BSE-Power Index with the latter gaining by about 42% as compared to Tata Power's gains of 29% over the same period.

Nevertheless, the possibility of the outcome being in the company's favour seems high, and with this there would be a substantial amount of improvement in financial performance, coupled with the positive effects of dealing with the earlier impairment provisions; not to mention the improving cash flow position due to the sale of coal asset (for US$ 510 m) as well. However, with the stock having run up the way it has, we believe investors should not buy any more shares of the company at current levels. We will be coming out with an updated view on the stock soon.

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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