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Tata Power: Lower fuel costs aid margins - Views on News from Equitymaster

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Tata Power: Lower fuel costs aid margins
Sep 1, 2009

Performance summary
  • Consolidated sales rise by 16% YoY during 1QFY10, led by 2% YoY growth in volume sales of electricity.
  • Operating margins rise to 25.4% in 1QFY10, from 16.8% in 1QFY09. Lower fuel costs due to sourcing of coal from its own coal mines in Indonesia lead to this rise in margins.
  • Higher operating margins show in net profits that have surged by 123% YoY during the quarter.


Consolidated performance
(Rs m) 1QFY09 1QFY10 Change
Power generation (m units) 3,935 4,260 8.3%
Units sold (m units) 4,115 4,180 1.6%
Net sales 40,533 47,017 16.0%
Expenditure 33,710 35,071 4.0%
Operating profit (EBDITA) 6,823 11,946 75.1%
Operating profit margin (%) 16.8% 25.4%  
Other income 791 802 1.3%
Interest 1,478 2,055 39.0%
Depreciation 1,524 2,011 31.9%
Profit before tax 4,612 8,682 88.3%
Tax 1,897 2,846 50.0%
Minority interest (188) (304)  
Share of profit/(loss) of associate (49) (5)  
Profit after tax/(loss)# 2,479 5,528 123.0%
Net profit margin (%) 6.1% 11.8%  
No. of shares 220.8 222.0  
Diluted earnings per share (Rs)*   68.6  
P/E ratio (x)*   18.9  
* On a trailing 12-months basis

What has driven performance in 1QFY10?
  • Tata Power grew its consolidated sales by 16% YoY during 1QFY10. The company benefited from higher power tariffs apart from the fact that it sold 1.6% higher volumes of electricity during the quarter, as compared to 1QFY09. The electricity business formed around 71% of the company’s consolidated sales during 1QFY10, while the coal mining business (Indonesia) formed another 25%. This business grew by 15% YoY during 1QFY10.

    Segment wise sales (Consolidated)
      1QFY09 1QFY10 Change
    Power      
    Revenue (Rs m) 28,883 33,430 15.7%
    % of total revenue 71.0% 70.9%  
    PBIT margins 10.9% 19.8%  
    Coal (Indonesian mines)      
    Revenue (Rs m) 10,118 11,584 14.5%
    % of total revenue 24.9% 24.6%  
    PBIT margins 29.3% 32.2%  
    Others*      
    Revenue (Rs m) 1,692 2,118 25.2%
    % of total revenue 4.2% 4.5%  
    PBIT margins 11.8% 10.2%  
    Source: Company press release
    * ‘Others' includes defense electronics, solar equipments, projects,
    coal bed methane and property development

  • Tata Power’s consolidated operating margins rose substantially to 25.4% during 1QFY10, from 16.8% in 1QFY09. This was on account of the fall in fuel costs. As percentage of sales, these costs declined from 36.7% in 1QFY09 to 26.4% in 1QFY10. Sourcing of coal from owned mines in Indonesia resulted in this decline in fuel costs for the company during the quarter. But for a rise in coal processing charges and cost of power purchased, the operating margins would have been even higher during 1QFY10.

  • Consolidated net profits grew by a substantial 123% YoY during 1QFY10, largely as a result of the sharp rise in operating margins. Decline in effective tax rate from 41% in 1QFY09 to 33% in 1QFY10 also helped the bottomline.

What to expect?
At the current price of Rs 1,300, the stock is trading at a multiple of 2.3 times our estimated FY12 book value for the company. Given that Tata Power has reported strong 1QFY10 consolidated results, we would however have to revise upwards our forward estimates for the company. The management has indicated that all its power generation projects (Mundra UMPP, Maithon, Jojobera and Trombay) are running as per schedule and that it has organised loans for each of them. The first unit of the Mundra UMPP is likely to be commissioned by September 2011. We had recommended the stock in January 2009 and the target price has already been breached. We now have a cautious outlook on the stock.

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