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Tata Power: Higher interest, taxes dent bottomline
Nov 3, 2009

Performance summary
  • Standalone sales fall by 13% YoY during 2QFY10, despite a 17% YoY growth in volume sales of electricity.
  • Operating margins rise to 22% in 2QFY10, from just 12% in 2QFY09 – improvement aided by lower fuel costs (as percentage of sales).
  • Despite a 60% YoY rise in operating profits, net profits decline by 30% YoY. Lower other income and substantially higher interest costs dent net profits.


Standalone performance
(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Power generation (m units) 3,459 4,046 17.0% 7,394 8,306 12.3%
Units sold (m units) 3,377 3,935 16.5% 7,492 8,115 8.3%
Net sales 19,242 16,723 -13.1% 39,134 36,479 -6.8%
Expenditure 16,942 13,043 -23.0% 34,154 26,876 -21.3%
Operating profit (EBDITA) 2,299 3,680 60.0% 4,980 9,603 92.8%
Operating profit margin (%) 12.0% 22.0%   12.7% 26.3%  
Other income 2,232 1,243 -44.3% 3,472 2,719 -21.7%
Interest 681 1,018 49.5% 1,203 2,195 82.5%
Depreciation 763 1,184 55.1% 1,494 2,302 54.1%
Profit before tax 3,087 2,721 -11.9% 5,755 7,825 36.0%
Tax 468 889 90.1% 1,231 2,223 80.6%
Profit after tax/(loss)# 2,619 1,832 -30.1% 4,525 5,603 23.8%
Net profit margin (%) 13.6% 11.0%   11.6% 15.4%  
No. of shares       221.4 237.1  
Diluted earnings per share (Rs)*         43.4  
P/E ratio (x)*         30.9  
* On a trailing 12-months basis

What has driven performance in 2QFY10?
  • Despite a 17% YoY growth in volume sales of electricity, Tata Power saw its standalone net sales (in value terms) decline by 13% YoY during 2QFY10. The company has attributed this to lower power tariffs, which were a result of lower fuel costs (as the company has to pass on lower costs to customers in terms of lower tariffs). The company generated 17% YoY more electricity during the quarter. This was aided by higher generation at its existing plants, plus commercialization of 190 MW of new capacity, which took its total generation capacity to 2,975 MW at the end of September 2009.

  • On the back of lower fuel costs as also lower cost of power purchased from external sources, Tata Power managed to improve its margins substantially to 22%, from 12% in 2QFY09. Fuel costs, for instance, were at 63.9% of sales in 2QFY10 as compared to 71.4% of sales in 2QFY09.

  • On the back of lower sales, and despite higher operating margins, Tata Power recorded 30% YoY decline in its standalone net profits during 2QFY10. This was largely on account of lower other income. This is on the back of lower forex gains during 2QFY10 (Rs 31 m) as compared to 2QFY09 (Rs 767 m). Lower dividend from subsidiaries in 2QFY10 (as compared to 2QFY09) also creates a high base for other income. Profits were also impacted by higher taxes, which jumped by 90% YoY. This has mainly been on account of change in MAT (minimum alternate tax) rules as proposed by the finance minister during the latest Budget.

What to expect?
At the current price of Rs 1,343, the stock is trading at a multiple of 2.3 times our estimated FY12 book value for the company. We had recommended the stock in January 2009 and the target price has already been breached. We now have a cautious outlook on the stock.

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