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  • Aug 24, 2011 - Tata Power: Distribution bottlenecks retard growth

Tata Power: Distribution bottlenecks retard growth

Aug 24, 2011

Tata Power has declared the results for the first quarter of financial year 2011-12 (1QFY12). The company has reported 2% YoY growth in net revenues while net profit has grown by 5% YoY. Here is our analysis of the results.

Performance summary
  • Generation as well as sale of power in terms of unit sales falls by 12% YoY and 13% YoY in 1QFY12.
  • Standalone revenues grow at a muted pace of 2% YoY during 1QFY12, largely due to a decline in sales of the power business.
  • Operating margins drop to 19% in 1QFY12, from 21% in 1QFY11 due to higher cost of power purchased (as a percentage of sales).
  • Despite higher other income (income from investments), net profits grow by just 5% YoY due to higher interest and tax outgo.

Standalone operating and financial performance
(Million units) 1QFY11 1QFY12 Change
Generation 4,386 3,869 -11.8%
Sales 4,533 3,932 -13.3%
(Rs m)
Net revenue 18,024 18,420 2.2%
Expenditure 14,170 14,933 5.4%
Operating profit (EBDITA) 3,854 3,487 -9.5%
EBDITA margin (%) 21.4% 18.9%  
Other income 1,929 3,268 69.4%
Depreciation 1,267 1,331 5.1%
Interest 796 1,124 41.2%
Profit before tax 3,720 4,300 15.6%
Tax 1,031 1,484 43.9%
Effective tax rate 28% 35%  
Profit after tax/(loss) 2,689 2,816 4.7%
Net profit margin (%) 14.9% 15.3%  
No. of shares (m)   237.3  
Diluted earnings per share (Rs)*   49.7  
Price to earnings ratio (x)   21.2  
(*On a trailing 12-month basis)

What has driven performance in 1QFY12?
  • Tata Power saw 2% YoY growth in its net sales during the quarter. Sales from the power business grew by 2% YoY. This was a result of higher realisation per unit on the company's merchant sales and was despite the fact that total volume sales of electricity dropped by 13% YoY during the quarter. Total generation of power for the year was down 11% YoY during 1QFY12, particularly due to higher fuel pricing and lower demand from the State Electricity Boards. Cost of power purchases was 10% of net revenues in 1QFY12 as against 14% of revenues in 1QFY11.

  • As for the company's coal mining business, net revenue grew on the back of better realizations. The coal realizations were up by almost 40% to US$ 87 per tonne from US$ 62 per tonne in 1QFY11. This is even as the company sold lesser coal during the quarter as compared to its volume sales in 1QFY11.

  • Tata Power's standalone operating margins shrunk to 18.9% during 1QFY12, from 21.4% in 1QFY11. 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.

  • Standalone net profits grew by 5% YoY during 1QFY12, largely as a result of the drop in operating margins despite higher other income. This rise in other income was due to a higher forex gain recorded during the fiscal.

  • The company had to pay higher taxes during the past 2 quarters due to deferred tax adjustments after the tax credit adjustments post commissioning of the wind units in 4QFY11.

  • While the Mundra UMPP project was 85% completed, the Maithon project was 95% completed by June 2011. Both are scheduled to become operational by FY12-FY13 adding 5,050 MW of capacity out of which power purchase agreements have already been signed for 4,850 MW of capacities.

What to expect?
At the current price of Rs 1,040, the stock is trading at a multiple of 1.3 times our estimated FY14 book value. The company plans to invest more in distribution of power in Mumbai as it has been able to pass on higher tariff costs to customer in this region. In comparison the Delhi distribution arm has not seen tariff rises for 3 years. Given the timely execution of projects and better visibility on the revenue front we believe that the company will remain at the forefront of power capacity addition in the country. Apart from its power generation and distribution plans, Tata Power is also progressing steadily in other related areas like power trading, and coal mining. We maintain our positive view on the stock from a 2-3 years perspective.

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