Power sector scenario in the country is looking positive with the coming of Electricity Act 2003, as the licensing norms have become easier. Generation companies will have right to enter distribution business and vice-a-versa. It will also promote competition in the power sector in the country as it gives choice of service providers to consumer. Provision of open excess in transmission will help companies to import electricity at cheaper rates and will definitely increase competition among the players. But what does this mean for Tata Power and Reliance Energy (BSES), the country’s two largest private sector players. How do they compare?
Tata Power Company (TPC) is the largest private player in the power sector, with a generation capacity of 2,278 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. Reliance Energy (REL), on the other hand, was formerly into distribution of power in the northern suburbs of Mumbai but in last few years it has entered into power generation and currently has a capacity of around 885 MW.
Let’s have a look at the performance of both the companies over last four years. If you would like to also compare Tata Power and NTPC, please click here.
The topline of Tata Power have shown a CAGR growth of 11% since FY00 but the bottomline witnessed a slower growth of around 2% over last four years mainly due to increased interest expenses and depreciation. However, operating margins have remained stable between 22% to 25%. The strength in topline growth is a result of capacity addition during this period. The plant load factor (PFL) of the Trombay plant has increased from 75% in FY00 to 92.6% in FY03. However, it is not possible to compare the over all PLF as the company has added capacity in steps.
Reliance Energy’s topline, on the other hand, has grown at a slower CAGR of 4% since FY00 and its bottomline has actually declined at CAGR of 14% in the last four years. The operating margins have also come down from 25% in FY00 to 15% in last three years. The PLF of its Dahanu plant stood at 90.5% in FY03. The company has not added much capacity over this period. Also, except for Mumbai region, its operations in other states have been a drag on its profitability. In the Mumbai region too, the company has had to contend with rising fuel costs as well as higher tariffs charged by TPC for the power supplied by it. Also, increasing interest and depreciation costs have further taken a toll on the bottomline of the company. However, FY03 was an aberration for the company as it changed its billing policy. The company has discontinued its previous policy of raising bills on customers on an estimated/provisional basis in cases where meter readings were not available. It is installing new meters so the effect will get wiped off in the coming quarters.
Tata Power is planning to add another 1,500 MW generation capacity by FY09. As per the company’s estimates, the expansion will raise the topline of the company by around 70% over next five years. The company’s generation expansion plans seem realistic keeping in mind its past track record on this front. The company is looking at Delhi, Maharashtra and Jharkhand among others where it plans to add capacity. Tata Power has also indicated that it is not averse to inorganic capacity expansion. The company also plans to increase its exposure to distribution circles and transmission networks going forward. Tata Power already has one distribution circle each in Orissa and New Delhi. It has also entered a JV with Power Grid Corporation for the 440 Kv Tala transmission project.
Reliance Energy has more aggressive plans. It vision it to increase generation capacity to 9,000 MW by 2012, almost 10 times its current capacity. The company has released its capacity addition plan of 3,000 MW in the Maharashtra, involving capex of Rs 120 bn and has filed an application for license to distribute power in Nashik, Aurangabad, Nagpur Pune zones and Vashi and Bhandup circles. However, the company has sought permission to directly distribute power to these regions bypassing the MSEB. 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 from current Rs 3.38.
What remains unanswered is that with a topline of Rs 23 bn and cash profits going down over last three years, an ambitious Rs 120 bn expansion plan will stretch the company’s resources in the medium term. Though the Reliance group has built up a reputation of being a fast executor of projects, it will definitely take some time for these new capacities to come up. So one has to wait and watch.
Assuming September 2002 as base.
As apparent from the graph above, the stock prices of both the companies have gained in the last one-year. At the current price of Rs 173, Tata Power trades at the P/E multiple of 6x, projected FY04 earnings. The expansion plans of the company look achievable and more stable. On the other hand, at the current price of Rs 352, REL trades at the forward P/E multiple of 25x, projected FY04 earnings. Due to the huge expansion plans, the company will have tough time in medium term, as it will put pressure on its cash flows and interest costs are likely to rise. The company seems to be thinking big for the long term, in line with the Reliance group philosophy. Investors too, seem to have built in generous expectations from the company, as is reflected from the valuations. In our view, capacity expansion will take some time to come for both companies. Consequently, revenue profile is unlikely to change in the near term. But in long term, both companies are likely to dominate India’s power development scene.
* FY04 Projections
|(Rs m) FY03
|Net Profit margin