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Tata Power: Forex gains propel bottomline
Jul 27, 2007

Performance summary
  • Sales grow 11% YoY in 1QFY08, led by 7% YoY higher electricity sales.

  • Operating margins contract by 220 basis points (2.2%) owing to higher staff and power purchase costs (both as percentage of sales).

  • Net profits up 56% YoY owing to higher other income and lower taxes – forex gains propel other income during the quarter.

Financial performance snapshot
(Rs m) 1QFY07 1QFY08 Change
Sales 13,684 15,115 10.5%
Expenditure 11,103 12,591 13.4%
Operating profit (EBDITA) 2,581 2,524 -2.2%
Operating profit margin (%) 18.9% 16.7%  
Other income 279 1,063 281.2%
Interest 394 594 51.0%
Depreciation 760 714 -6.0%
Profit before tax 1,706 2,279 33.6%
Tax 488 377 -22.7%
Profit after tax/(loss) 1,219 1,902 56.1%
Net profit margin (%) 8.9% 12.6%  
No. of shares   197.9  
Diluted earnings per share (Rs)*   38.7  
P/E ratio (x)*   18.3  
* On a trailing 12 month basis

What is the company’s business?
Tata Power (TPC) is the largest private player in the power sector with a generation capacity of 2,324 MW, which is around 19% of the total power generation capacity of the private sector in India and a mere 2% of the country’s total capacity. Out of this installed capacity, around 80% is used for supplying electricity to the Mumbai region. Apart from power generation, the company also has interests in areas like transmission and distribution and power trading.

What has driven performance in 1QFY08?
Higher volumes, tariff aid topline growth: Tata Power’s 11% YoY growth in topline during 1QFY08 was made up of 7% YoY increase in electricity sales and 4% YoY higher tariffs. Against 3,807 m units (MUs) of electricity old in 1QFY07, the company sold 4,056 MUs during the latest quarter. Moreover, average tariff from these sales stood at Rs 3.7 per unit during 1QFY08, against Rs 3.5 in 1QFY07. Sales in the Mumbai license area (86% of total sales in 1QFY08) grew by 14% YoY, which was a result of 9% higher volume sales and revised tariffs. Higher volume sales were both a result of increased generation at its owned plants and higher purchase from external sources. As a matter of fact, the company’s power generation increased by 1% YoY, from 3,824 MUs in 1QFY07 to 3,860 MUs in 1QFY08.

The management has indicated that work at its 250 MW coal based unit at Trombay (current capacity at 1,330 MW) is progressing well. This expanded capacity is expected to get commissioned in FY09 and will cater to increasing energy requirements in the Mumbai region.

The quarter also saw the company completing the acquisition of 30% stake in the Indonesian coal mining company Bumi Resources. As per the management, the acquisition specifically addresses fuel requirements for Mundra ultra-mega power project (UMPP), Trombay and the coastal power project in Maharashtra. Also, during the quarter, the Tala transmission project, which has been executed by Powerlinks Transmission Limited (a 51:49 joint venture between Tata Power and PGCIL) began operations. As a matter of fact, the project involved construction of the 400 kV / 1200 km transmission lines from the Tala Hydro Project (Bhutan) to Delhi region and will provide power to the deficit states in North India, while also facilitating the transmission of surplus power from the North-Eastern region.

Higher purchase, staff costs dent margins: Tata Power recorded higher (as percentage of sales) staff and power purchase costs during the quarter, which impacted its operating margins. While the former increased from 3% of sales in 1QFY07 to 4.3% in 1QFY08, the latter expanded from 12.9% to 13.8%. But for the decline in fuel costs (from 59.4% of sales in 1QFY07 to 58.1% in 1QFY08), the pressure on operating margins would have been greater.

Forex gains power bottomline growth: Despite the contraction in operating margins, Tata Power’s bottomline growth outperformed its topline growth during 1QFY08. This was made possible by the Rs 379 m forex gain that the company recorded as its other income during the quarter. The company benefited on account of exchange differences on borrowed funds and liabilities in foreign currencies due to a strong rupee (as a matter of fact, while a strong rupee is negative for exporters, it benefits companies that have US dollar denominated loans on their books as the per dollar value of the loan declines). A lower tax rate (16.5% in 1QFY08 versus 28.6% in 1QFY07) also helped propel the bottomline to record a 56% YoY growth during the quarter.

What to expect?
At the current price of Rs 706, the stock is trading at a multiple of 1.9 times our estimated FY10 book value for the company. The fact that Tata Power is progressing well on its generation capacity expansion plans is a positive. Specifically, we maintain that the winning of the Mundra UMPP and acquisition of Indonesian mines towards securing fuel supplies for the same is a long-term positive for the company, as this will add significant value to its growth in the future. The decline in raw material costs during the quarter has been a positive, as the company had been facing pressure on its profitability in the previous quarters owing to rising fuel prices.

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