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Tata Power: Spark in margins

Jul 27, 2004

Introduction to results
Tata Power, the largest private sector power company in India, declared results for 1QFY05 yesterday. Both topline as well as bottomline of the company increased marginally (up 1% and 2% respectively). The operating margins of the company improved significantly during the quarter. Consequently, despite a lower other income during the quarter, net profit margins of the company witnessed a marginal improvement.

(Rs m) 1QFY04 1QFY05 Change
Net sales 10,811 10,869 0.5%
Other income 242 175 -27.7%
Expenditure 7,852 7,345 -6.5%
Operating profit (EBDITA) 2,959 3,523 19.1%
Operating profit margin (%) 27.4% 32.4%  
Interest 779 597 -23.3%
Depreciation 815 1,209 48.3%
Profit before tax 1,607 1,892 17.7%
Extraordinary items 96 0 -
Tax 517 875 69.4%
Profit after tax/(loss) 994 1,016 2.2%
Net profit margin (%) 9.2% 9.4%  
No. of shares (m) 197.9 197.9  
Diluted earnings per share (Rs)* 20.1 20.5  
P/E ratio (x)   12.7  
(* annualised)      

Business profile of the company
Tata Power (TPC) is the largest private player in the power sector, with a generation capacity of 2,278 MW, which is 52% of the total power generation capacity of private sector in the country. Of the total installed capacity, 79% is supplied to Mumbai region. Power business contributed to around 95% of its total revenues in FY04. It has presence in the power distribution segment in states like Orissa and New Delhi as well. The company has entered the transmission segment, signing an agreement with the Power Grid Corporation of India for 400 KV Tala Transmission Project, India's first inter-state transmission project with private sector participation

What drives the performance in 1QFY05?
Sales: The company has witnessed a 13% increase in power generation during the quarter. However, the same is not getting reflected in the topline growth due to the fact that company has to pass on the additional benefits of fuel efficiency to its consumers. As a result, the average realisation per unit of power sold came down (average realisation came down to Rs 2.94 per unit of power sold during the quarter as Rs 3.34 same quarter last year). As reported by the company, the overall demand in the Mumbai region grew by 7% during the quarter. Revenue from non-power business increased by 63% during the quarter.

Operating margins: As expected, the operating margins of the company improved significantly during the quarter (up 500 basis points). The improvement is due to the fact that TPC has been able to reduce the fuel cost to a large extent (fuel cost per unit of power produced stood at Rs 1.45 as compared to Rs 1.65 last year, an improvement of 13%). Apart from the fuel efficiency, the company has been able to put a check on its other costs like staff cost, cost of components and other expenses.

Net profit: Led by significant improvement in the operating profit and lower interest burden, the PBT of the company stood higher by 17%. However, bottomline of the company is was up only 2% because of higher tax provision during the quarter. Going forward, Tata Power’s power distribution arm, North Delhi Power Ltd is also expected to contribute to the bottomline. Aggregate Technical & Commercial (AT&C) losses in the Delhi circle during the quarter decreased by 7% over the corresponding period last year.

What to expect?
At the current price level of Rs 260, the P/E ratio of the company stood at Rs 12.7x annualised 1QFY05 earnings. Given the emerging opportunities, the company plans to add 1,500 MW of generating capacity over the next five years. This amounts to an expansion of about 70% to its current capacity. This includes the 120 MW plant at Jojobera and the 330 MW hydropower project in Uttaranchal and two 500 MW power plants each at Vile in Maharashtra. The triggers in the near term are the Tala Transmission line going live and the improving performance of the Delhi distribution business.

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