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Tata Power: Lower realizations effects

Oct 26, 2004

Introduction to results
Tata Power, the largest private sector power company in India, declared results for the September quarter yesterday. Both topline as well as bottomline of the company declined during the quarter. The operating margins of the company were down significantly. Consequently, despite higher other income, net profit of the company shrunk by 17%.
(Rs m) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
Net sales 10,619 9,404 -11.4% 21,436 20,272 -5.4%
Expenditure 7,173 7,205 0.5% 15,025 14,551 -3.2%
Operating profit 3,447 2,199 -36.2% 6,411 5,722 -10.8%
Operating profit margin (%) 32.5% 23.4%   29.9% 28.2%  
Other income 490 987 101.5% 732 1,162 58.9%
Interest 617 487 -21.1% 1,396 1,085 -22.3%
Depreciation 821 751 -8.5% 1,636 1,960 19.8%
Profit before tax 2,498 1,948 -22.1% 4,110 3,839 -6.6%
Extraordinary items 45 - - 140 -  
Tax 746 532 -28.6% 1,262 1,407 11.5%
Profit after tax/(loss) 1,708 1,415 -17.1% 2,848 2,432 -14.6%
Net profit margin (%) 16.1% 15.1%   13.3% 12.0%  
No. of shares (m) 197.9 197.9   197.9 197.9  
Diluted earnings per share (Rs)* 34.5 28.6   20.1 24.6  
P/E ratio (x)   10.1     11.8  
(* annualised)            

What is the company's business?
Tata Power (TPC) is the largest private player in the power sector, with a generation capacity of 2,278 MW, which is 52% of the total power generation capacity of private sector in the country. Of the total installed capacity, 79% is supplied to Mumbai region. Power business contributed to around 95% of its total revenues in FY04. It has presence in the power distribution segment in states like Orissa and New Delhi as well. The company has entered the transmission segment, signing an agreement with the Power Grid Corporation of India for the 400 KV Tala Transmission, India's first inter-state transmission project with private sector participation.

What drives the performance in 2QFY05?
Sales: The company has witnessed a marginal increase in power generation, while sale of electricity in the Mumbai licence area increased by 5.4%. However, reduction in tariff to the tune of 12.4% has led to decline in the topline of the company during the quarter. The company has managed to save Rs 310 m from better fuel mix and it passed on this benefit to the consumers by reducing the tariff by 15 paise per unit. As a result, the average realisation per unit of power sold came down to Rs 3.05 per unit, which however, was higher than average realization per unit in 1QFY05, which stood at Rs 2.94.

Operating margins: As expected, the operating margins of the company declined by 910 basis points. The basic reason for this fall is lower realization per unit as well as increase in other expenditure. Also, the work that has started on Tala transmission line seems also to have escalated costs. However, the company was able to reduce its fuel cost backed by better fuel mix.

Cost break-up…
(Rs m) 2QFY04 2QFY05 Change
Staff Cost 374 356 -5.0%
as % of sales 3.5% 3.8%  
Cost of Power Purchased 1,005 1,028 2.3%
as % of sales 9.5% 10.9%  
Cost of Fuel 4,625 4,321 -6.6%
as % of sales 43.5% 45.9%  
Cost of components,
materials and services
in respect of contracts
246 411 67.0%
as % of sales 2.3% 4.4%  
Other expenditure 924 1,090 18.1%
as % of sales 8.7% 11.6%  
Total 7,173 7,205 0.5%

Net profit: Led by significant fall in both topline and the operating profit, the net profit of the company in the quarter declined by 17%. Even though there was an extraordinary income of Rs 510 m account of profit on sale of its investments in Haldia Petrochemicals and Tata Telecom, the net profit margin declined by 100 basis points. Despite the one time income, which attracts higher tax rate, the provision for tax was lower. This helped Tata Power save its net profit margin. However, the company has to provide for higher tax in subsequent quarters.

What to expect?
At the current price level of Rs 290, the P/E ratio stands at Rs 11.8x annualised 1HFY05 earnings. Given the emerging opportunities, the company plans to add 1,500 MW of generating capacity over the next five years. This amounts to an expansion of about 70% to its current capacity. This includes the 120 MW plant at Jojobera and the 330 MW hydropower project in Uttaranchal and two 500 MW power plants each at Vile in Maharashtra. The triggers in the near term are the Tala Transmission line going live and the improving performance of the Delhi distribution business.

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