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Tata Power: Where does it stand?

Sep 21, 2001

In the last one year Tata Power has continued to be in the thick of things. First came merging of the three companies and then the chairman, Mr. Ratan Tata’s statement that Tata Power would be the group’s vehicle for its communication foray. The proposed LNG foray, buying out Tata Petrodyne and taking over the transmission business of Tata International followed later. Quite a busy year by any standards! The merging of the three companies gave it a bigger base on paper, but the three companies were anyway functioning as one earlier. But it sure did manage to catch the market’s attention. The telecom and broadband foray were also welcomed, as globally power companies follow the same model. On the back of this the stock price zoomed from the Rs 50 levels to Rs 170 odd. But then it couldn’t stay there for long. The reason. Well, by that time the TMT euphoria had died down and people began to question about what kind of revenues the broadband plan would bring in.

Sources inside the Tata group agree that the broadband venture would take atleast three years to break-even. It may very well exceed that. The strategy is to become a carrier’s carrier and to target telco’s and call centres as potential customers. But then Reliance is also aiming for that. Industry analysts agree that in this battle only the fittest would survive. Already the telecom venture is eating into the company’s profits (estimated loss Rs 500 m per annum).

The proposed LNG foray has yet to commence. However, the company had stated at it analyst meet in June 2001 that it would make definite moves towards LNG by March 2002.

The only silver lining for Tata Power is its very own ‘power’ business. Its captive power generation (CPP) capacity is slated to zoom from 800 MU (million units) currently to around 2,000 MU by FY03. Considering the fixed return on capital on which the power business in India operates, this should add to its bottomline progressively.

The other good news for Tata Power is the acquisition of Tata Petrodyne. The company earned a net profit of Rs 160 m on revenues of 450 m from the oil business in FY01. By FY06 the management expects the net profit to shoot up to Rs 1,130 m on a revenue base of around Rs 3,000 m.

On the current price of Rs 100 the stock trades at a P/E of 5.7x annualised 1QFY02 earnings. The valuation would reflect the company’s power strengths in times to come. However, telecom could continue to be a drain. Any progress on the acquisition of Dabhol power plant could also affect the valuation depending on the terms of the deal.


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