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Tata Power: Fuel costs weigh on profits

Nov 12, 2012

Tata Power has declared the results for the second quarter and first half of financial year 2012-13 (1HFY13). The company has reported 24% YoY growth in standalone net revenues while net profits grew by just 2.3% YoY in the first half. Here is our analysis of the results.

Performance summary
  • Standalone revenues grow by 24% YoY during 1HFY13, largely due to higher generation of hydro power and increase in wind power capacity.
  • Standalone operating margins drop to 15.2% in 1HFY13, from 18.8% in 1HFY12 due to higher cost of power purchased as well as higher cost of fuel (as a percentage of sales).
  • Negligible growth in other income and higher interest outgo led to net profits for 1HFY13 growing by just 2.3% YoY.
  • On consolidated basis, the company reported revenue growth of 22% while losses at the net level in 2QFY13 were lower than in the corresponding quarter of FY12.

Standalone performance summary
(Rs m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Generation 3,772 4,272 13.3% 7,661 8,531 11.4%
Sales 3,793 4,235 11.7% 7,725 8,462 9.5%
Net revenue 18,643 24,090 29.2% 37,064 45,990 24.1%
Expenditure 15,297 19,919 30.2% 30,085 39,000 29.6%
Operating profit (EBDITA) 3,346 4,171 24.7% 6,979 6,990 0.2%
EBDITA margin (%) 17.9% 17.3%   18.8% 15.2%  
Other income 4,158 3,070 -26.2% 7,426 7,467 0.5%
Depreciation 1,352 1,556 15.1% 2,663 3,104 16.6%
Interest 1,158 1,642 41.8% 2,452 3,028 23.5%
Profit before tax 4,994 4,043 -19.0% 9,290 8,325 -10.4%
Tax 1,865 1,083 -41.9% 3,344 2,241 -33.0%
Effective tax rate 37% 27%   36% 27%  
Profit after tax/(loss) 3,129 2,960 -5.4% 5,946 6,084 2.3%
Net profit margin (%) 16.8% 12.3%   16.0% 13.2%  
No. of shares (m)         2,373.3  
Diluted earnings per share (Rs)*         4.3  
Price to earnings ratio (x)         23.4  
(*On a trailing 12-month basis)

What has driven performance in 1HFY13?
  • Tata Power witnessed 13% and 11% YoY growth in power generation volumes in the second quarter and first half of FY13 respectively. The high growth outside Mumbai operations was primarily due to higher demand in Jojobera as against power outages last fiscal. Net sales were up by 10% YoY in volume terms in 1HFY13. The operating margins were impacted by the rise in fuel cost as a percentage of sales. Cost of fuel went up to 63% in 1HFY13 from 55% in 1HFY12.

  • On segmental basis, while revenue from the power segment is up 40% YoY; that from coal segment is down 5% YoY in 2QFY13. Operating profits for the power segment went up from 12% in 2QFY12 to 13% in 2QFY13. The same went down from 28% in 23QFY12 to 14% in 2QFY13 for the coal business.

  • In order to support the cash flows of Mundra UMPP, Tata Power plans to transfer to it at least 75% of its equity interest in the Indonesian coal units to its subsidiary Coastal Gujarat Power Ltd (CGPL). This will protect the standalone business from the risk of price volatility on coal to be used in power generation, to the extent not covered by price escalations and to support its cash flows. Hence it has not made provisions for diminution in value of investments in the standalone accounts. Mundra UMPP achieved 96.73% progress until end of September 2012.

  • The other income came in lower by almost 26% YoY in 2QFY13 mainly due to lower dividend from coal SPVs.

  • The higher interest charges in 1HFY13 were due to the hybrid bond issuance and capitalization of assets including wind assets.

What to expect?
At the current price of Rs 100, the stock is trading at a multiple of 1.3 times our estimated FY15 book value. Notwithstanding the fact that Tata Power boasts of the maximum number of long term contracts in the power sector, the company also has sufficient upsides to its regulated returns. Also, unlike its peers, Tata Power does not have a very aggressive growth plan. Hence its capacity execution record is likely to be better.

With a turnaround in the UMPP business in the medium to long term, we believe that Tata Power's consolidated return ratios will see significant upsides in the next three years. Hence despite the possibility of some near term hiccups (our estimates and target price have been revised accordingly), we believe that investors have enough reasons to Hold the stock.

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