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Tata Power: Charting path for growth

Oct 23, 2003

Tata Power, India's largest private sector utility, has reported around 12% decrease in the topline for 2QFY04. However, due to reduced tax provision and lower interest outgo, it has managed to post around 27% increase in bottomline.

(Rs m) 2QFY03 2QFY04 Change 1HFY03 1HFY04 Change
Sales 12,021 10,625 -11.6% 22,425 21,446 -4.4%
Other Income 565 490 -13.3% 862 732 -15.1%
Expenditure 8,621 7,222 -16.2% 16,544 15,179 -8.3%
Operating Profit (EBDIT) 3,400 3,403 0.1% 5,881 6,267 6.6%
Operating Profit Margin (%) 28.3% 32.0%   26.2% 29.2%  
Interest 854 617 -27.8% 1,572 1,396 -11.2%
Depreciation 804 821 2.1% 1,628 1,636 0.5%
Profit before Tax 2,307 2,455 6.4% 3,544 3,966 11.9%
Tax 957 745 -22.2% 1,357 1,262 -7.0%
Profit after Tax/(Loss) 1,350 1,710 26.6% 2,187 2,704 23.6%
Net profit margin (%) 11.2% 16.1%   9.8% 12.6%  
Diluted no. of Shares (eoy) (m) 197.9 197.9   197.9 197.9  
Diluted Earnings per share* 27.3 34.6   22.1 27.3  
Current P/e ratio   6.3     7.9  

Fuel cost form a major chunk of the total expenditure. A 17% reduction in the same has led to significant improvement in the operating margins. On half yearly basis, fuel cost as percentage of total sales has gone down from 48% to 45%. Cost of power purchased as well as other expenses has also reduced significantly. We expect the margins to improve further as the company has entered in agreement with a leading consultant to curb the operating expenses.

Cost break-up
(Rs m) 2QFY03 2QFY04 Change 1HFY03 1HFY04 Change
Cost of power purchased 1,080 1,005 -7.0% 2,077 2,095 0.9%
Cost of fuel 5,569 4,625 -17.0% 10,824 9,808 -9.4%
Staff cost 207 374 80.7% 558 841 50.7%
Other expenses 1,766 1,219 -31.0% 3,085 2,436 -21.0%
Total 8,621 7,223 -16.2% 16,544 15,180 -8.2%

In order to grab the opportunity in the power sector, Tata Power is planning to increase generation capacity by another 1,500 MW by 2009. The company has plans to increase its topline by 70% in next five years. As a first step, it is expected to complete a 120 MW expansion at Jojobera by 2005. Today, the company’s board has approved to jointly develop the 330 MW Srinagar hydropower project in Uttaranchal with Synergies Hydro Asia (SHA), at an estimated cost of Rs 16.5 bn.

The distribution business has been a loss-making venture for the company till date. The 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.

At the current price level of Rs 216, the stock trades at P/E multiple of 7.9x, annualised 1HFY04 earnings. The company has not explained the cause of the fall in topline during the September quarter. We will try and throw some for light on the issue, once we get a detailed release from the company.

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) continues to raise concerns.

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