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Tata Power: What lies ahead... - Views on News from Equitymaster
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  • Sep 9, 2003

    Tata Power: What lies ahead...

    With the recently introduced power sector reforms, the industry's prospects as a whole are looking promising. Just to put things in perspective, bonds worth Rs 115 bn have already been issued to NTPC in lieu of one-time settlement of various State Electricity Board dues. Bonds worth Rs 55 bn will be issued in another month's time. So the reforms, which we used to talk till today, are finally getting implemented now. Tata Power is the largest private sector player in the power sector currently and will play an important role in the sector going ahead. Let's take a look at what the company has planned for its future.

    Tata Power Company (TPC) is the largest private player in the power sector, with a power generation capacity of 2278 MW, which is 52% of the total power generation capacity of the private sector in the country. Out of Tata Power's total installed capacity, 79% lies in the Mumbai circle. Power business contributes around 95% of the total revenues. The company has begun to make its presence felt in the power distribution business too.

    In FY03, the company reported a healthy growth in sales (up 13%), mainly due to addition of new capacities in Jojobera. Operating margins also improved significantly. The total electricity generation moved up by 10.3% to 12,996 MU out of which Trombay plant contributed around 70%. Operating margins improved significantly due to reduction in other expenses. In 1QFY04, topline of the company grew by 4% but the bottomline grew by 18% mainly due reduction in cost of fuel purchased.

    As far as the future plans of the company are concerned, with the restructuring of SEBs and anti-theft laws becoming more stringent, it plans to expand both its generation as well distribution capacities. Looking at the huge potential, the company is planning to expand its power generation capacity by 1,500 MW till FY09. Both inorganic as well as organic modes have been chosen for expansion. It has obtained statutory approvals to install an additional 120 MW plant at Jojobera scheduled to be commissioned by 2005-06. However, it will take time for new additions to contribute to the topline growth.

    Distribution has been a loss-making venture for the company till date. Company's technical and commercial losses in its Delhi distribution circle are still alarmingly high. However, North Delhi Power Ltd. (NDPL) has brought down the losses to 48% in 9 months of FY03 as compared to 50% FY02 and is required to bring it down to 31% by March 2007.

    A traditional concern with this company is its moves to enter into unrelated businesses in the past (petrochemicals and broadband communication etc). Though the company has exited from its broadband communications business and is looking to sell off its petro business (Petrodyne), the company's intentions to invest in 'adjacent infrastructure businesses', as mentioned in its 2003 annual report (no clarity regarding the same) raises concerns once again.

    Another concern for the company is that Reliance Energy (REL) has recently approached the state regulator to take advantage of open access on existing infrastructure, under which it will be using the existing transmission network of MSEB (Maharashtra State Electricity Board) and Tata Power to import cheap power from various other sources. TPC has been charging about 35% more to REL, following which REL has been charging the per unit tariff of Rs 3.38 to its customers. If REL gets the nod, it will provide stiff competition to Tata Power in future, as it will be able to supply electricity at its targeted price of Rs 2.50, which will be around 25% cheaper.
    (Rs m) Tata Power Reliance energy (BSES)
    Revenues 43,005 23,033
    PAT 5,199 1,623
    EPS (Rs) 26.3 11.8
    P/E (x) 7.2 30.3

    At the current price of Rs 184, stock trades at P/E multiple of 7.4x FY03 earnings. Tata Power is on right track with its electricity generation capacity and distribution circle expansion plans. For investors it will have to be a patient wait.



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