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Tata Power: Hurt by lower margins, forex loss - Views on News from Equitymaster

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Tata Power: Hurt by lower margins, forex loss
Aug 13, 2010

Tata Power has announced its 1QFY11 results. On a consolidated basis, the company has reported a 7% YoY growth in sales and 43% YoY decline in net profits. Here is our analysis of the results.

Performance summary
  • Standalone sales fall by 7% YoY during 1QFY11. Consolidated sales up 7% YoY.
  • Operating margins fall sharply to 24.1% for the standalone entity. For the consolidated business, margins decline to 20.4% led by higher power purchase costs (as percentage of sales).
  • Consolidated net profits fall by 43% YoY during the quarter. This was on account of weaker margins, a large forex loss, and higher depreciation.

Financial performance snapshot
  Standalone Consolidated
(Rs m) 1QFY10 1QFY11 Change 1QFY10 1QFY11 Change
Power generation (m units) 4,260 4,386 3.0% NA NA  
Units sold (m units) 4,180 4,533 8.4% NA NA  
Net sales 20,156 18,679 -7.3% 48,528 51,848 6.8%
Expenditure 13,833 14,170 2.4% 37,194 41,268 11.0%
Operating profit (EBDITA) 6,323 4,509 -28.7% 11,334 10,581 -6.6%
Operating profit margin (%) 31.4% 24.1%   23.4% 20.4%  
Other income 1,076 1,275 18.6% 687 (894)  
Interest 1,177 796 -32.4% 2,055 1,718 -16.4%
Depreciation 1,118 1,267 13.3% 1,285 1,542 20.0%
Profit before tax 5,104 3,722 -27.1% 8,682 6,426 -26.0%
Tax 1,333 1,032 -22.6% 2,846 2,890 1.6%
Share of profit of associates NA NA   (5) 44  
Minority interest NA NA   304 403 32.8%
Profit after tax/(loss)# 3,771 2,690 -28.7% 5,528 3,177 -42.5%
Net profit margin (%) 18.7% 14.4%   11.4% 6.1%  
No. of shares       222.0 237.3  
Diluted earnings per share (Rs)*         73.0  
P/E ratio (x)*         18.2
NA-Not applicable; * On a trailing 12-months basis

What has driven performance in 1QFY11?
  • Despite an 8% YoY growth in volume sales of electricity, Tata Power saw its standalone sales (in value terms) decline by 7% YoY during 1QFY11. This can be attributed to lower fuel costs that the company passed on to its customers in the form of lower tariffs. The company also produced more power using cheaper RLNG (as against oil), which led to lower fuel costs and subsequently lower tariffs.

  • As for the consolidated business, sales were up 7% YoY during the quarter. This was led by a 5% YoY growth in the power business (67% of total sales) and 19% YoY growth in the coal mining business (30% of total sales). As per the management, growth in the coal mining business was largely on the back of higher production and improved coal prices.

    Segment wise performance (Consolidated)
      Standalone Consolidated
      1QFY10 1QFY11 Change 1QFY10 1QFY11 Change
    Power            
    Revenue (Rs m) 19,827 18,281 -7.8% 33,430 35,048 4.8%
    % of total revenue 98.4% 97.9%   68.9% 67.2%  
    PBIT margins 27.1% 18.6%   19.8% 14.8%  
    Coal (Indonesian mines)            
    Revenue (Rs m) NA NA   12,981 15,391 18.6%
    % of total revenue       26.7% 29.5%  
    PBIT margins       28.7% 27.5%  
    Others*            
    Revenue (Rs m) 329 398 20.9% 2,118 1,721 -18.7%
    % of total revenue 1.6% 2.1%   4.4% 3.3%  
    PBIT margins 25.7% 15.2%   10.2% -5.4%  
    * "Others' includes defense electronics, solar equipments, projects, coal bed methane and property development

  • On the back of higher power purchase costs, Tata Power saw a 3% YoY decline in its consolidated operating margins during the quarter. These costs increased from 23.7% of sales in 1QFY10 to 30.6% in 1QFY11. The management has attributed this to the fact that the company was prevented from selling power generated by it to its distribution business in Mumbai (owing to the legal battle with Reliance Infra). Tata Power’s fuel costs however declined to 22.7% of sales during the quarter, from 25.5% in 1QFY10.

  • Led by weaker operating margins, a big forex loss, and higher depreciation, Tata Power reported a 43% YoY decline in consolidated net profit during 1QFY11. The company incurred a (marked-to-market) forex loss of Rs 1.5 bn during the quarter. This was due to restatement of its forex loans (taken for the Mundra UMPP) due to depreciation of the rupee against the US dollar. On excluding this forex loss, net profits are still down around 15% YoY during the quarter.

What to expect?
At the current price of Rs 1,330, the stock is trading at a multiple of 1.8 times our estimated FY13 book value per share. The company is making a steady progress on its capacity expansion schedule. The ultra-mega project at Mundra is in fact 53% complete. The company’s expects the first unit to become operational by September 2011. We maintain our view on the stock from a 2-3 years perspective.

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