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Tata Power: Powering ahead

Sep 23, 2004

Power stocks have witnessed significant buying interest over the last one-month in line with the positive market sentiment. The top gainer in the sector during this period was Tata Power (up 15%) followed by Reliance Energy (up 7%). However, we feel that this is not without reason. Let us consider the long-term growth prospects of the Indian power sector as well as Tata Power (TPC).Power is one of the most important vehicles of for infrastructure growth, which in turn is necessary for a country's higher economic growth. Availability of reliable power at affordable rates can enable the industry to be globally competitive and kick start substantial employment opportunities. However, India has largely remained a power deficient country with per capita consumption of power being just around 355 units as compared to world average of 2,156 units. The table below shows the demand supply gap of the power sector over the last five years.

Demand-Supply gap
YearRequiredAvailabilityDeficit (mu)
2000480,430 450,494 29,936
2001507,216 467,400 39,816
2002522,537 483,530 39,007
2003545,983 497,890 48,093
2004559,246 519,398 39,848
Percapita comparison
CountryAverage MU consumed
India355
China827
Brazil1878
US12331
World average2156

However, in recent times, the government has recognized the importance of power and has set an ambitious target of increasing the per capita consumption to 1,000 units by 2012, which is almost three times the current level. The 10th plan had set a target to add 41,110 MW of generation capacity by 2007.

Amidst the above background, let us consider the future prospects of one of India's leading power companies belonging to one of the most respected business houses in the world - Tata Power. Given the emerging opportunities in the Indian power sector, the company has firmed up plans to add 1,500 MW of generating capacity over the next five years. This amounts to an expansion of about 70% over its current capacity. Of this proposed capacity, 120 MW is being added to its Jojobera plant and the 330 MW hydropower project in Uttaranchal. The remaining capacity would be in the form of two 500 MW power plants each at Vile in Maharashtra.

TPC has already invested in the Delhi distribution circle and the Tala transmission project. Its Delhi power distribution company has become profitable and will start to contribute to the overall profitability of the company from the current year onwards. The company has applied for distribution licenses in the other areas as well. With the passage of Electricity Act 2003, the distribution and transmission businesses hold huge potential and Tata Power is already gearing up to take advantage of the same.

Comparative Valuations
 Tata PowerReliance Energy
Generation capacity (MW)2,278 941
OPM (%)28.1%10.3%
NPM (%)12.0%11.0%
Current price (Rs) 313 650
Price/Earning multiple (x)11.929.7
Price/Book value (x)1.212.5

At the current price of Rs 313, the stock trades at P/E multiple of 11.9x FY04 earnings and at 1.2 times on the price to book value basis, which is relatively cheaper as compared to its peer Reliance Energy. However, the higher valuation of Reliance Energy should be viewed in light of its huge capacity addition plans. Nonetheless, the triggers for TPC in the medium term is the Tala Transmission Line going live, which is likely to start adding to the company's bottomline from FY06 onwards and the improving performance of the Delhi distribution business.

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