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Tata Power: ‘Extra-ordinary’ effect! - Views on News from Equitymaster
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Tata Power: ‘Extra-ordinary’ effect!
Oct 19, 2005

Performance Summary
Private sector power major, Tata Power, announced its results for the second quarter and first half of FY06 late yesterday. While strong volumes have aided the topline growth for the quarter, the effect of an extra-ordinary income in the corresponding quarter of previous fiscal has impacted the bottomline. Operating margins have remained under pressure, mainly on account of rise in cost of fuel and power purchased.

Financial performance: A snapshot
(Rs m) 2QFY05 2QFY06 Change 1HFY05 1HFY06 Change
Sales 9,404 10,616 12.9% 20,272 21,603 6.6%
Expenditure 7,205 8,213 14.0% 14,551 16,790 15.4%
Operating profit (EBDITA) 2,199 2,403 9.3% 5,722 4,814 -15.9%
Operating profit margin (%) 23.4% 22.6%   28.2% 22.3%  
Other income 987 421 -57.4% 1,162 736 -36.6%
Interest 487 430 -11.7% 1,085 809 -25.4%
Depreciation 751 682 -9.3% 1,960 1,338 -31.8%
Profit before tax 1,948 1,712 -12.1% 3,839 3,403 -11.3%
Extraordinary income/(expense)            
Tax 529 456 -13.8% 1,404 963 -31.4%
Profit after tax/(loss) 1,419 1,257 -11.4% 2,435 2,441 0.2%
Net profit margin (%) 15.1% 11.8%   12.0% 11.3%  
No. of shares 197.9 197.9   197.9 197.9  
Diluted earnings per share* (Rs) 28.7 25.4   24.6 24.7  
P/E ratio (x)         17.1  
(* annualised)            

What is the company’s business?
Tata Power (TPC) is the largest private player in the power sector with a generation capacity of 2,324 MW, which is around 19% of the total power generation capacity of the private sector in India and a mere 2% of the country’s total capacity. Out of this installed capacity, around 80% is used for supplying electricity to the Mumbai region. Power business contributes to around 95% of TPC’s revenues. Apart from power generation, the company also has interest in areas like transmission and distribution and power trading.

What has driven performance in 2QFY06?
Volume led growth: A 10% YoY growth in volume sales has aided TPC’s topline growth during 2QFY06 while realisations were stable at around Rs 2.9 per unit. The company sold 3,341 m units (MUs) during the quarter, which was a 10% YoY growth over 3,027 MUs that were sold in 2QFY05. A 7% YoY growth in generation (3,420 MUs), mainly due to the commissioning of a 120 MW capacity at Jojobera (Jharkhand) led to higher unit sales during 2QFY06. The Mumbai license area witnessed a growth of 12% YoY in volume sales and accounted for around 82% of the total volumes sold during the quarter. TPC’s other business segments have reported a combined 21% YoY growth in revenues during 2QFY06.

Segment-wise performance…
  2QFY05 2QFY06 Change 1HFY05 1HFY06 Change
Power Business  
Revenue 8,912 9,876 10.8% 19,362 20,474 5.7%
% share 94.4% 92.9%   95.3% 94.6%  
PBIT margin 17.0% 17.3%   19.9% 17.1%  
Revenue 525 755 43.9% 958 1,162 21.2%
% share 5.6% 7.1%   4.7% 5.4%  
PBIT margin 2.8% 0.6%   3.8% -1.1%  
Revenue 9,437 10,631 12.7% 20,320 21,635 6.5%
PBIT margin 16.2% 16.1%   19.2% 16.1%  
* Excluding inter-segment adjustments            
* Excluding inter-segment adjustments

Higher fuel costs dent margins: Fuel costs, which were around 48% of TPC’s 2QFY06 sales, up from 46% of sales in 2QFY05, have dented operating margins during the quarter. This was mainly on account of the sustenance of high global crude oil prices and short supply of coal in the Indian market. The rise in fuel costs would have been higher but for the increased hydel power supply during the quarter on account of strong inflow of water into TPC’s lakes in Maharashtra post the heavy rainfall witnessed in July and August.

Investors should note that TPC's cost of generating electricity has traditionally been on the higher side. This has been largely due to the company's use of the relatively expensive liquid fuel like LSHS (low sulphur heavy stock), the price of which is dependent on the movement of global crude prices. It must be noted that strict pollution control norms in Mumbai especially, have led to Tata Power relying on oil as opposed to coal. Now with the company receiving permission to increase coal firing from 2,940 tonnes per day to 5,800 tonnes per day, we expect the cost of generation to reduce going forward, which might aid operating profitability. We have estimated TPC’s operating margins to marginally decline from 24.2% in FY05 to 24.0% in FY06. This fall is likely to be on account of rise in power purchase costs and other overheads while cost of fuel is estimated to decline from 47.5% of sales in FY05 to 47.0% in FY06.

Extra-ordinary effect on bottomline: Apart from the effect of contraction in operating margins, a one-time income recorded in 2QFY05 has led to the decline in bottomline during 2QFY06. Investors should note that TPC has recorded an income of Rs 514 m during 2QFY05 on account of gains on sale of its investments in Tata Telecom and Haldia Petrochemicals. If one were to exclude this extra-ordinary income of 2QFY05, the bottomline growth has been 39% YoY and 27% YoY during 2QFY06 and 1HFY06 respectively.

Performance in the recent past…
  1QFY05 2QFY05 3QFY05 4QFY05 1QFY06 2QFY06
Sales growth (YoY, %) 0.5 (11.4) (11.0) (7.4) 1.1 12.9
Profits growth (YoY, %) 2.2 (17.1) (25.6) 213.8 16.5 (11.4)
Operating margins (%) 32.4 23.4 23.8 16.3 21.9 22.6

Some of the key events for TPC during the quarter were:

  1. The company has reported that its 51% joint venture with Power Grid Corporation (Powerlinks Transmission Ltd.) for the construction of 400 kV transmission lines from Tala in Bhutan to the Delhi region is likely to be completed well ahead of the scheduled commissioning date of July 2006. Notably, this will be India's first inter-state transmission project with private sector participation.

  2. The Tata Power-Delhi Government joint venture (North Delhi Power Limited) has over performed the regulatory target for reduction of the Aggregate Transmission & Commercial (AT&C) losses. As indicated, the regulatory target of AT&C loss reduction to 35.4% to be achieved at the end of this financial year has already been achieved at 32.6%.

  3. Tata Power Trading Company Ltd. traded 200 MUs during the quarter, which was 5% YoY growth over 191 units sold during 1QFY06.

  4. The company has entered into an agreement with the Jharkhand government to evaluate projects of around 3,000 MW along with captive coal mining facilities. As per the management, there are prospects of revamping the existing power generation plants in Jharkhand and participation in transmission and distribution.

  5. TPC has signed a share purchase agreement (for 74% stake) with Damodar Valley Corporation for the proposed 1,000 MW thermal power project being developed by Maithon Power Ltd.

What to expect?
At the current price of Rs 423, the stock is trading at a price to earnings multiple of 12.8 times our estimated FY08 earnings. TPC has lined up large expansion plans in the future, which include the entire spectrum of the power sector – from power generation to transmission and distribution. These initiatives, together with the fact that the company is in the process of shifting its focus from being a Mumbai centric player to having a national presence, augurs well for its growth. TPC remains among our preferred plays from the power sector from the long-term perspective.

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