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Tata Power: Fuel costs spoil show - Views on News from Equitymaster

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Tata Power: Fuel costs spoil show
Jul 28, 2008

Performance summary
  • Net sales grow by 34% YoY during 1QFY09, aided by increase in volume sales of electricity as also higher tariff per unit sold.

  • EBIDTA margins contract by 2% YoY on the back of higher fuel costs (as percentage of sales).

  • Net profits remain flat on a YoY basis. Effect of higher sales growth spoiled by decline in other income and substantially higher tax expenses.



Financial performance snapshot (Standalone)
(Rs m) 1QFY08 1QFY09 Change
Sales 15,115 20,261 34.0%
Expenditure 12,249 16,823 37.3%
Operating profit (EBDITA) 2,866 3,438 20.0%
Operating profit margin (%) 19.0% 17.0%  
Other income 685 483 -29.4%
Interest 558 522 -6.4%
Depreciation 714 731 2.3%
Profit before tax 2,279 2,668 17.1%
Tax 377 763 102.6%
Minority interest      
Share of profit/(loss) of associate      
Profit after tax/(loss) 1,902 1,906 0.2%
Net profit margin (%) 12.6% 9.4%  
No. of shares 197.9 220.8  
Diluted earnings per share (Rs)*   39.4  
P/E ratio (x)*   25.6  
* On a trailing 12-months basis

What has driven performance in 1QFY09?
  • Tata Power grew its standalone sales by 34% YoY during 1QFY09. The company benefited from higher generation and volume sales. While the former grew by 1.9% YoY during the quarter, the latter grew by 1.5% YoY. As for generation, while the same at the company’s Trombay plant was 1% YoY higher, hydro generation declined by 21% YoY on account of poor monsoons as compared to the previous year. The company’s wind power generation grew by a strong 56% YoY on the back of capacity expansion and favourable wind conditions. Tata Power’s sales in the Mumbai licensed area (86% of total sales) grew by 35% YoY on the back of higher tariff due to passing-on of rising fuel costs.

  • Tata Power’s operating margins declined by 2% YoY during the first quarter. This was on account of the rise in fuel costs. As percentage of sales, these costs increased from 58.1% in 1QFY08 to 63.6% in 1QFY09. Decline in other costs (also as percentage of sales) though pared some pressure off the margins during 1QFY09.

  • Tata Power’s net profits grew by a very marginal 0.2% YoY during 1QFY09. This was despite a strong growth in sales during the quarter, and was a result of decline in other income (down 29% YoY). The substantial rise in tax expenses (due to higher deferred taxes) also impacted the bottomline performance – effective tax rate sharply jumped from 16.5% in 1QFY08 to 28.6% in 1QFY09.

What to expect?
At the current price of Rs 1,010, the stock is trading at a multiple of 2.8 times our estimated FY10 book value. The management has indicated that all its power generation projects (Mundra UMPP, Maithon, Jojobera and Trombay) are running as per schedule. During the current fiscal, the company is planning to increase capacity by 600 MW. We maintain our positive view on stock from a long-term perspective.

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