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Tata Power: Higher taxes dent bottomline
Nov 27, 2009

Performance summary
  • Consolidated sales fall by 1% YoY during 2QFY10, grows 7% YoY during 1HFY10.
  • Operating margins rise to 20.4% in 2QFY10. Improvement led by lower fuel costs (as percentage of sales).
  • Net profits fall 31% YoY led by weak sales performance and lower other income. Higher taxes also dent profits.


Consolidated 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 46,272 45,612 -1.4% 86,805 92,629 6.7%
Expenditure 37,713 36,294 -3.8% 71,424 71,365 -0.1%
Operating profit (EBDITA) 8,559 9,318 8.9% 15,382 21,264 38.2%
Operating profit margin (%) 18.5% 20.4%   17.7% 23.0%  
Other income 1,306 964 -26.2% 2,097 1,766 -15.8%
Interest 1,695 1,877 10.8% 3,173 3,933 23.9%
Depreciation 1,788 2,244 25.5% 3,312 4,255 28.5%
Profit before tax 6,382 6,160 -3.5% 10,994 14,842 35.0%
Tax 1,048 2,387 127.7% 2,945 5,233 77.7%
Share of profit of associates 222 189 -14.9% 174 184 6.2%
Minority interest 187 275 47.3% 374 579 54.6%
Profit after tax/(loss)# 5,369 3,687 -31.3% 7,848 9,215 17.4%
Net profit margin (%) 11.6% 8.1%   9.0% 9.9%  
No. of shares       221.4 237.1  
Diluted earnings per share (Rs)*         57.2  
P/E ratio (x)*         22.9  
* On a trailing 12-months basis

What has driven performance in 2QFY10?
  • Tata Power recorded a 1% YoY decline in its consolidated sales during 2QFY10. This was a result of a similar decline in sales from the power business (70% of total sales). The company has attributed fall in power sales to lower power tariffs. This is because the company passes on lower costs to customers in terms of lower tariffs. The coal business (25% of sales) saw a 7% decline during the quarter.

    Segment wise sales (Consolidated)
      2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
    Power            
    Revenue (Rs m) 32,190 31,986 -0.6% 61,073 65,416 7.1%
    % of total revenue 69.4% 69.9%   70.1% 70.4%  
    PBIT margins 9.1% 13.2%   9.9% 16.6%  
    Coal (Indonesian mines)            
    Revenue (Rs m) 12,133 11,308 -6.8% 22,251 22,892 2.9%
    % of total revenue 26.2% 24.7%   25.6% 24.6%  
    PBIT margins 34.0% 30.1%   31.9% 31.2%  
    Others*            
    Revenue (Rs m) 2,051 2,498 21.8% 3,743 4,616 23.3%
    % of total revenue 4.4% 5.5%   4.3% 5.0%  
    PBIT margins 5.0% 11.3%   8.1% 10.8%  
    * "Others" includes defense electronics, projects, coal bed methane and property development

  • On the back of lower fuel costs, Tata Power improved its operating margins during 2QFY10. These stood at 20.4% in 2QFY10, as compared to 18.5% in 2QFY09. Fuel costs were at 26.9% of sales in 2QFY10 as compared to 34.9% of sales in 2QFY09.

  • Led by higher taxes and already weaker sales, Tata Power recorded a 31% YoY decline in consolidated net profits during 2QFY10. Effective tax rates jumped from 16% in 2QFY09 to 39% in 2QFY10. Lower other income (down 26% YoY) also dented the bottomline picture.

What to expect?
At the current price of Rs 1,310, the stock is trading at a multiple of 2.3 times our estimated FY12 book value per share. The 1HFY10 results are fairly in line with our estimates. We had recommended the stock in January 2009 and the target price has already been breached. We now have a cautious outlook on it largely on the back of its valuations that already capture growth for the next 2-3 years.

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