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Tata Power: Uncertainty looms... - Views on News from Equitymaster

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Tata Power: Uncertainty looms...
Nov 20, 2014

Tata Power declared its results for the quarter and half year period ended September 2014. The company's standalone revenues fell by 8% YoY, while profits rose by 17% YoY during the quarter. Here is our analysis of the results.

Performance summary
  • Standalone revenues decline 8% YoY during 2QFY15, in line with the decline in sales volumes.
  • Operating profits fall by 11% YoY during the quarter, while profits before tax come in flat (higher by 1% YoY).
  • Company's consolidated revenues decline by 4% YoY while net loss stands at Rs 323 m.
  • During 1HFY15, standalone revenues and profits decline by 9% YoY.

Standalone financial performance
(Rs m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
Generation 3,404 3,123 -8.3% 7,301 6,424 -12.0%
Sales 3,762 3,484 -7.4% 7,898 7,262 -8.1%
Net revenue 21,995 20,347 -7.5% 48,070 43,631 -9.2%
Expenditure 15,972 14,977 -6.2% 34,616 32,777 -5.3%
Operating profit (EBDITA) 6,023 5,370 -10.9% 13,455 10,854 -19.3%
EBDITA margin (%) 27.4% 26.4%   28.0% 24.9%  
Other income 1,299 2,634 102.8% 3,755 5,279 40.6%
Depreciation 1,396 1,458 4.4% 2,759 2,874 4.2%
Interest 1,620 2,559 58.0% 3,992 5,080 27.3%
Gain/ (Loss) on exchange (836) (474) -43.3% (1,493)  (906) -39.3%
Profit before tax 3,470 3,512 1.2% 8,966 7,273 -18.9%
Tax 852 449 -47.3% 2,778 1,650 -40.6%
Effective tax rate 25% 13%   31% 23%  
Profit after tax/(loss) 2,618 3,063 17.0% 6,188 5,623 -9.1%
Net profit margin (%) 11.9% 15.1%   12.9% 12.9%  
No. of shares (m)       2,373.1 2,704.6  
Diluted earnings per share (Rs)*         5.2  
Price to earnings ratio (x)         17.2  
*On a trailing 12-month basis

What has driven performance in 2QFY15?

  • Tata Power's standalone revenues declined by 8% YoY during the quarter. The company's performance was impacted by lower generation at its Mumbai operations (forced outage). Higher other income (largely due to higher treasury income and dividends from subsidiaries) as well as lower forex losses helped in curbing the decline in profits before tax during the quarter.

  • Tata Power's consolidated revenues came in lower by 4% YoY largely due to a 12% YoY decline in its coal business' revenues. Lower coal realizations have been the main reason for the same. In terms of segments, EBIT margins of the company's consolidated power business came in at 16%, as compared to 13.8% in same quarter last year. However, the coal businesses margins fell to 7.7% as compared to 9.3% on the back of lower realizations. The coal business contributes to a fourth of the consolidated revenues and about 15% of the pre-tax (EBIT) profits.
What to expect?
At the current price of Rs 89, the stock is trading at a multiple of about 1.7 times its FY14 book value per share.

Some of the key factors going against the company include lower coal prices, which has taken a toll on its coal business coupled with hurdles related to implementation of compensatory tariffs which are currently stuck in legal disputes.

Further given the company's balance sheet strain (although it has been working towards lowering debt levels) coupled with its eroding networth (due to Mundra losses), there are no major capex plans and capacity increase expected over next few years. As such, growth would remain subdued. This coupled the uncertainties surrounding the Mundra project as well as the not so cheap valuations leads us to maintain our negative view on the stock. It may be noted that we had released a 'Sell' view update on the stock a few months ago when the stock was trading at about Rs 101.

We would like to remind our subscribers that for the purpose of risk minimisation, one should avoid having more than 5% exposure on any one stock from the overall equity portfolio. Please do visit our section for further details.

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