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Tata Power: Other income saves the day

Aug 14, 2012

Tata Power has declared the results for the first quarter of financial year 2012-13 (1QFY13). The company has reported 19% YoY growth in standalone net revenues while net profits grew by 11% YoY. Here is our analysis of the results.

Performance summary
  • Standalone revenues grow by 19% YoY during 1QFY13, largely due to higher generation of hydro power and increase in wind power capacity.
  • Standalone operating margins drop to 12.9% in 1QFY13, from 19.8% in 1QFY12 due to higher cost of power purchased as well as higher cost of fuel (as a percentage of sales).
  • Thanks to higher other income (income from investments, dividends forex gains) and lower effective taxes, net profits for 1QFY13 grew by 10.9% YoY despite lower operating margins.
  • Losses at the consolidated level escalate on account of Coastal Gujarat Power Ltd (CGPL), the subsidiary building the Mundra plant, due to higher operating cost, interest costs and freight charges.

Standalone financial performance
(Rs m) 1QFY12 1QFY13 Change
Generation Sales 3,889 4,259 9.5%
3,932 4,227 7.5%
Net revenue 18,420 21,900 18.9%
Expenditure 14,769 19,081 29.2%
Operating profit (EBDITA) 3,651 2,819 -22.8%
EBDITA margin (%) 19.8% 12.9%  
Other income 3,267 4,396 34.6%
Depreciation 1,330 1,548 16.4%
Interest 1,293 1,386 7.2%
Profit before tax 4,295 4,281 -0.3%
Tax 1,479 1,158 -21.7%
Effective tax rate 34% 27%  
Profit after tax/(loss) 2,816 3,123 10.9%
Net profit margin (%) 15.3% 14.3%  
No. of shares (m)   2,373.3  
Diluted earnings per share (Rs)*   4.5  
Price to earnings ratio (x)   22.1  
* On a trailing 12-months basis

What has driven performance in 1QFY13?
  • Tata Power witnessed 4% YoY growth in power generation in its Mumbai operations and 23% YoY growth in outside Mumbai operations in the first quarter of FY13. The latter was primarily due to higher demand in Jojobera as against power outages last fiscal. The company grew its power generation by 9.5% YoY in 1QFY13 while net sales were up by 8% YoY in volume terms. The growth in sales revenue was affected on account of lower realisation per unit on the company's merchant sales. The merchant power realizations were Rs 3 per kwh as against Rs 3.3 per kwh in 1QFY12.

  • The distribution subsidiary and Joint-Venture with Delhi government, Tata Power Delhi Distribution (TPDDL) saw 50% drop in profits in 1QFY13 despite the regulator having hiked tariffs effective September 2011, mainly due to expenses incurred on repairs of transformers.

  • The first unit of its Mundra-based ultra mega power project (UMPP) of 800 MW, which commenced commercial operations in the March quarter, reported a loss. To curb losses, the company has commenced trials of blending low-grade coal, and initial reports suggest blending up to 50% is feasible. This should help keep a check on losses. The second unit of Maithon and Mundra are expected to be commissioned in the June and September quarters and should add to top line. Together these will add 5,050 MW of capacity out of which power purchase agreements have already been signed for 4,850 MW.

  • As for the company's coal mining business, net profits grew by 138% YoY during 1QFY13. This was on the back of better higher dividends realized. In order to support the cash flows of Mundra UMPP, Tata Power plans to transfer to it at least 75% of its equity interest in the Indonesian coal units to its subsidiary Coastal Gujarat Power Ltd (CGPL). This will protect the standalone business from the risk of price volatility on coal to be used in power generation, to the extent not covered by price escalations and to support its cash flows. Hence it has not made provisions for diminution in value of investments in the standalone accounts.

  • Tata Power's standalone operating margins shrunk to 12.9% during 1QFY13, from 19.8% in 1QFY12. This was on account of the rise in power purchase costs. The company also recorded a rise in its other expenses, due to higher coal mining and selling and distribution costs.

What to expect?
At the current price of Rs 100, the stock is trading at a multiple of 1.3 times our estimated FY15 book value. Notwithstanding the fact that Tata Power boasts of the maximum number of long term contracts in the power sector, the company also has sufficient upsides to its regulated returns. Also, unlike its peers, Tata Power does not have a very aggressive growth plan. Hence its capacity execution record is likely to be better.

With a turnaround in the UMPP business in the medium to long term, we believe that Tata Power's consolidated return ratios will see significant upsides in the next three years. Hence despite the possibility of some near term hiccups (our estimates and target price have been revised accordingly), we believe that investors have enough reasons to Hold the stock.

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