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Tata Power: Investment gain saves day
Oct 31, 2007

Performance summary
  • Sales grow 13% YoY in 2QFY08, 11% YoY in 1HFY08. Growth during the quarter led by 8% YoY increase in electricity sales; generation up 5% YoY.

  • Operating margins contract by 1% during the quarter, owing to higher fuel costs (as percentage of sales).

  • Net profits up 27% YoY, duly aided by gains on sale of investments and lower depreciation expense. Excluding the impact of investment gains, net profits are down 15% YoY during 2QFY08.

  • Signs EPC contract with Toshiba Corporation for supply of five 800 MW steam turbine generators for the Mundra ultra mega power project.

Financial performance snapshot
(Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Sales 11,998 13,506 12.6% 25,682 28,620 11.4%
Expenditure 9,483 10,803 13.9% 20,725 23,051 11.2%
Operating profit (EBDITA) 2,515 2,703 7.5% 4,957 5,569 12.3%
Operating profit margin (%) 21.0% 20.0%   19.3% 19.5%  
Other income 783 463 -40.9% 1,193 1,078 -9.6%
Interest 408 414 1.5% 793 972 22.5%
Depreciation 731 709 -3.0% 1,491 1,423 -4.6%
Profit before tax 2,160 2,043 -5.4% 3,866 4,252 10.0%
Extraordinary income/(expense) - 851   - 921  
Tax 137 320 134.4% 624 697 11.7%
Profit after tax/(loss) 2,023 2,574 27.2% 3,242 4,476 38.1%
Net profit margin (%) 16.9% 19.1%   12.6% 15.6%  
No. of shares         207.8  
Diluted earnings per share (Rs)*         39.5  
P/E ratio (x)*         31.1  
* On a trailing 12 month basis

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. Apart from power generation, the company also has interests in areas like transmission and distribution and power trading.

What has driven performance in 2QFY08?
Higher generation, volume sales aid topline: Tata Power recorded a 13% YoY growth in sales during 2QFY08. This was on the back of 8% YoY increase in electricity sales. Higher sales were aided by a 5% YoY increase in generation volumes as the company’s plants in Trombay and Jojobera recorded high rates of capacity utilisation. The company’s business in the Mumbai license recorded sales growth of 16% YoY during the quarter. These sales contributed to 87% of the company’s 2QFY08 total sales (84% in 2QFY07). These were duly helped by the fact that Tata Power brought 60 MW of power from its Belgaum plant to Mumbai through its trading arm to meet the city’s rising requirements.

The management has indicated that work on its 4,000 MW ultra mega power project at Mundra is progressing on schedule. After completing the acquisition of 30% stake in the Indonesian coal mining company for securing fuel for this plant, this quarter saw Tata Power signing an EPC contract with Toshiba Corporation for supply of five 800 MW steam turbine generators.

Higher fuel costs dent margins: Tata Power recorded a 1% YoY contraction in its operating margins during 2QFY08. This was due to higher fuel costs, which increased from 51% of sales in 2QFY07 to 57.8% of sales in 2QFY08. However, the company’s cost of power purchased dropped by 4.9% as percentage of sales, which took off some pressure from the operating profitability.

‘Extraordinary’ aid to bottomline: Despite the contraction in operating margins, Tata Power’s bottomline growth outperformed its topline growth during 2QFY08. This was made possible by Rs 851 m gain on sale of investments. Excluding the same, the net profits have actually declined by 15% YoY for the quarter.

What to expect?
At the current price of Rs 1,228, the stock is trading at a multiple of 3.2 times our estimated FY10 book value for the company. The fact that the stock has moved up sharply over the past month despite any change in business fundamentals makes us a bit cautious. However, considering that the company is progressing well on its generation capacity expansion plans, we maintain our positive view on the long-term growth prospects of the company. We shall soon update our research report on the company.

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