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Tata Power: Capacity expansion on track
Jun 23, 2008

Performance summary
  • Standalone and consolidated sales grow 26% YoY and 68% YoY in FY08 – the latter aided by consolidation of numbers of the Indonesian coal mine companies. Excluding the same, consolidated sales have grown by 35% YoY during the fiscal.
  • Standalone operating margins expand by 1% YoY during the fiscal, owing to lower cost of power purchased (as percentage of sales). On a consolidated basis, margins are up almost 3% due to lower cost of fuel and power purchased (both as percentage of sales).

  • Standalone bottomline growth at 25% YoY; consolidated at 39% YoY. Effective tax rate of 24% in FY08 against a negative tax (credit) in FY07 leads to this wide difference between PBT (up 135% YoY) and net profit of the consolidated business.

  • Board recommends dividend of Rs 10.5 per share (dividend yield of 0.9%).

Financial performance snapshot
  Standalone Consolidated
(Rs m) FY07 FY08 Change FY07 FY08 Change
Sales 47,153 59,159 25.5% 64,756 108,909 68.2%
Expenditure 39,919 49,535 24.1% 53,918 87,580 62.4%
Operating profit (EBDITA) 7,234 9,624 33.0% 10,839 21,328 96.8%
Operating profit margin (%) 15.3% 16.3%   16.7% 19.6%  
Other income 3,440 4,658 35.4% 2,671 4,787 79.2%
Interest 1,895 1,676 -11.6% 2,761 4,988 80.7%
Depreciation 2,919 2,905 -0.5% 4,148 5,593 34.8%
Profit before tax 5,860 9,701 65.5% 6,601 15,534 135.3%
Tax (1,108) 1,002   (991) 3,765  
Share of profit/(loss) of associates NA NA   195 (49)  
Minority interest NA NA   (189) (1,170)  
Profit after tax/(loss) 6,968 8,699 24.8% 7,598 10,551 38.9%
Net profit margin (%) 14.8% 14.7%   11.7% 9.7%  
No. of shares       197.9 220.7  
Diluted earnings per share (Rs)       34.4 47.8  
P/E ratio (x)         24.9  

What has driven performance in FY08?
  • Standalone topline: The 26% YoY growth in Tata Power’s topline during FY08 was aided by higher sales of electricity as also improved realisation (per unit tariff). The company’s volume sales of electricity increased by 3.7% YoY to 14,959 m units (MUs). This is the highest ever sale that Tata Power has recorded for any fiscal. The growth in volumes was a direct consequence of increase in generation of electricity. Tata Power’s plants generated a total of 14,717 MUs of electricity during FY08, which was a rise of 3.1% YoY. First full year of the expanded wind power capacity of 45 MW (addition of 16 MW during FY08) and improved utilisation of thermal plants were factors that led to growth in power generation during the fiscal.

    The company’s Trombay plant (near Mumbai - 1,330 MW of capacity) for instance operated at a plant load factor (PLF – capacity utilisation) of 85.6% during FY08, against a PLF of 81.6% recorded during the previous fiscal. This plant contributed to 68% of the company’s total generation during the fiscal.

  • Consolidated topline: Tata Power’s consolidated topline grew by 68% YoY during FY08. This growth was largely aided by the consolidation of Indonesian coal mine companies which Tata Power had acquired (30% stake) in June 2007. Revenue from these mines contributed to 20% of the consolidated sales during FY08. It was also the first full year of operation of Power Links Transmission Ltd., Tata Power’s joint venture with Power Grid Corporation of India Ltd. (PGCIL) to carry out transmission activities. This JV recorded 82% YoY and 184% YoY growth in sales and profit after tax respectively during the fiscal, thus aiding Tata Power’s overall performance. Also, the company’s trading arm – Tata Power Trading Co. Ltd. – reported sales growth of 46% YoY during the year, which was a result of 42% YoY increase in trading volumes.

    Tata Power’s power distribution business in Delhi – North Delhi Power Ltd. (NDPL) – in which it owns a 51% stake, recorded 11% YoY growth in sales during the fiscal. NDPL also did well to reduce its aggregate technical and commercial (AT&C) losses further to 18%, from 23.7% in FY07. Importantly, the current AT&C loss figure is 3.6% lower than the Delhi electricity regulator’s approved level. This resulted in an incentive of Rs 534 m to Tata Power during FY08.

  • Operating margins: Tata Power’s standalone operating margins expanded by 1% YoY during the fiscal, owing to lower cost of power purchased (as percentage of sales). On a consolidated basis, margins were up almost 3% owing to lower cost of fuel and power purchased (both as percentage of sales). For the standalone business, fuel costs increased from 57.4% of sales in FY07 to 62.8% in FY08. This rise in fuel costs was directly passed on to the consumers (through increase in electricity tariffs, as per regulations) and the effect was seen in increased sales during the fiscal despite no meaningful addition to generation capacity.

  • Bottomline picture: Tata Power recorded 25% YoY and 39% YoY respective increase in its standalone and consolidated bottomline during FY08. There was however a wide divergence between the growth in bottomline and that in its profit before tax (PBT - grew 66% YoY and 135% YoY for standalone and consolidated business respectively). For the consolidated business for instance, an effective tax rate of 24% in FY08 against a negative tax (credit) in FY07 has led to this wide difference between PBT and net profit. The management indicated during the conference call that the increase in tax rate was on account of provisions that have been made for profits of the Indonesian coal mines.

  • Capacity expansion: Tata Power has outlined a capex of Rs 500 bn to set up additional generation capacities of around 10,500 MW over the next 5-6 years. This shall take the company’s capacity to 12,861 MW by 2013, from the current levels of 2,368 MW. As part of this broader plan, the company is already working on a capacity of 6,000 MW requiring capex of Rs 250 bn. All these projects are expected to be funded in a debt to equity ratio of 70:30, as per the electricity regulator’s specified norms.

    Tata Power: Capacity expansion schedule
    Project Capacity (MW) Cost (Rs m) Status
    Under implementation
    Mundra UMPP (Gujarat) 4,000 170,000 Financial agreemens signed, Work started on boiler busilding, civil tasks
    Maithon project (JV with Damodar Valley Corp.) 1,050 44,500 Equipment orders places, power purchase agreements signed
    Trombay - Unit 8 (Maharashtra) 250 NA To be commissioned by October 2008
    Wind farm project-Gujarat, Karnataka 101 NA Orders placed, to be commissioned by the end of this fiscal
    Captive project for Tata Steel - Unit 6 (Jamshedpur) 120 NA To be commissioned by end of this fiscal
    Captive project for Tata Steel - Unit 5 (Jamshedpur) 120 NA To be commissioned in FY10
    Haldia power plant (W. Bengal) 120 NA To be commissioned by end of this fiscal
    Planned (Not currently under implementation)
    Coastal Maharashtra project* 2,400 NA Discussions on with government of Maharashtra for land acquisition
    Others* 2,332 NA NA
    Total 10,493 500,000  
    * Not currently under implementation Source: Company's press release

    As for the Mundra UMPP (ultra mega power project), the first of the five units will be commissioned in September 2011. The Maithon project’s first unit will be commissioned in 2010 and the second in 2011. Trombay 250 MW Unit 8 will become operational by October this year. During FY09 itself, the company plans to expand capacity by 600 MW.

    Total capex outlined for the current fiscal is Rs 10 bn (Rs 11 bn was spent in FY08). Currently, we have factored in only 370 MW of expansion in FY09 (250 MW of Trombay and 120 MW at Jamshedpur), which we shall subsequently increase to reflect the company’s plans.

    Towards meeting the requirements of the expanded capacity, Tata Power has outlined doubling its coal imports to 3 m tonnes (MT) during FY09. Most of these supplies will come from the company’s Indonesian coal mines. As a matter of fact, PT Bumi Resources (which is the holding company of coal mines owned by Tata Power in Indonesia) had recently announced of newly discovered coal reserves, which shall take its output by 32% to 1.84 bn metric tonnes. This is good news for Tata Power considering that its coal requirements will shoot up to 22 MT per year once all the planned capacities come on stream.

    Towards shipping this coal into India, Tata Power plans to spend US$ 150 m to hire nine capesize bulk carriers. Though, as was recently reported, Tata Power has extended a contract with Mercator Lines Singapore Ltd. to move 3.2 MT of coal to India from Indonesia between June 2008 and May 2012. The companies had agreed in 2006 to transport about 1.9 MT of coal annually over four years.

What to expect?
At the current price of Rs 1,192, the stock is trading at a multiple of 21.4 times and 3.3 times our estimated FY10 earnings and book value respectively. Tata Power’s FY08 performance has been above our estimates, especially on the topline front. And with the company planning to increase capacity by 600 MW during the current year (against our estimated figure of 370 MW), we shall be revising upwards our numbers for the company. In the meanwhile though, considering that Tata Power is progressing well on its generation capacity expansion plans, we maintain our positive view on stock from a long-term perspective.

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