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Tata Power: High fuel costs dent profits
Nov 1, 2008

Performance summary
  • Net sales grow by 45% YoY during 2QFY09, 39% YoY during 1HFY09. Growth mainly aided by improvement in realisation as volume sales decline for both the periods.

  • Operating margins contract by a sharp 6.2% YoY during the quarter on the back of higher fuel costs (as percentage of sales).

  • Net profits remain almost flat on a YoY basis. Effect of higher sales growth spoiled by decline in operating margins and higher tax expenses as also change in accounting policies.



Financial performance snapshot (Standalone)
(Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Generation (m units) 3,684 3,459 -6.1% 7,544 7,394 -2.0%
Sales (m units) 3,811 3,377 -11.4% 7,867 7,492 -4.8%
Net sales 13,318 19,242 44.5% 28,169 39,134 38.9%
Expenditure 10,892 16,942 55.5% 23,520 34,154 45.2%
Operating profit (EBDITA) 2,426 2,299 -5.2% 4,650 4,980 7.1%
Operating profit margin (%) 18.2% 12.0%   16.5% 12.7%  
Other income 1,592 2,232 40.2% 2,918 3,472 19.0%
Interest 414 681 64.5% 972 1,203 23.8%
Depreciation 709 763 7.6% 1,423 1,494 5.0%
Profit before tax 2,895 3,087 6.7% 5,173 5,755 11.3%
Extraordinary income/(expense) NA NA   NA (1,555)  
Tax 320 468 46.1% 697 1,231 76.6%
Profit after tax/(loss)# 2,574 2,619 1.7% 4,476 4,525 1.1%
Net profit margin (%) 19.3% 13.6%   15.9% 11.6%  
No. of shares       207.8 221.4  
Diluted earnings per share (Rs)*         39.5  
P/E ratio (x)*         17.5  
* On a trailing 12-months basis
# Excluding extraordinary adjustments

What has driven performance in 2QFY09?
  • Tata Power grew its standalone sales by 45% YoY during 2QFY09. The company largely benefited from higher realisation, which at an average of Rs 5.7 per unit was 63% YoY higher than the Rs 3.5 per unit rate earned in 2QFY08. The growth in sales could however have been better but for a 11% YoY decline in volume sales on the back of 6% YoY decline in generation.

  • Tata Power’s operating margins declined by a sharp 6.2% YoY during the quarter. This was on account of the rise in fuel costs. As percentage of sales, these costs increased from 58.6% in 2QFY08 to 71.4% in 2QFY09. Decline in staff costs and cost of power purchased (both as percentage of sales) though pared some pressure off the margins during 2QFY09.

  • Tata Power’s net profits grew by a very marginal 1.7% YoY during 2QFY09. This was despite a strong growth in sales during the quarter, and was a result of decline in operating margins and higher tax expenses. Effective tax rate sharply jumped from 11.1% in 2QFY08 to 15.2% in 2QFY09.

What to expect?
    At the current price of Rs 690, the stock is trading at a multiple of 17.5 times its trailing 12 months earnings. Tata Power’s 1HFY09 performance has been fairly in line with our estimates. The management has indicated that all its power generation projects (Mundra UMPP, Maithon, Jojobera and Trombay) are running as per schedule and that it has organised loans for each of them. The first unit of the Mundra UMPP is likely to be commissioned by September 2011. In order to strengthen its renewable energy portfolio, Tata Power recently acquired an 11% stake in Geodynamics Limited, Australia, which specialises in geothermal energy. We maintain positive view on the stock from a 2 to 3 years perspective.

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