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Tata Power: Upping the ante! - Views on News from Equitymaster

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Tata Power: Upping the ante!

Nov 28, 2006

Performance summary
India’s largest private sector power generating company, Tata Power, yesterday announced decent results for the second quarter and first half ended September 2006. For 2QFY07, while revenues have grown by 14% YoY, the strong bottomline growth has been a result of tax write-backs. Profit before tax has grown by 26% YoY during the quarter. On the back of higher fuel and staff costs, operating margins have, however, shrunk by 200 basis points (2%).

Standalone financial performance: A snapshot
(Rs m) 2QFY06 2QFY07 Change 1HFY06 1HFY07 Change
Sales 10,551 12,008 13.8% 21,472 25,701 19.7%
Expenditure 8,148 9,513 16.8% 16,659 20,625 23.8%
Operating profit (EBDITA) 2,403 2,495 3.8% 4,814 5,076 5.5%
Operating profit margin (%) 22.8% 20.8%   22.4% 19.8%  
Other income 421 783 86.1% 736 1,193 62.0%
Interest 430 388 -9.9% 809 912 12.8%
Depreciation 682 731 7.3% 1,338 1,491 11.5%
Profit before tax 1,712 2,160 26.1% 3,403 3,866 13.6%
Tax 456 137 -70.0% 963 624 -35.2%
Profit after tax/(loss) 1,257 2,023 61.0% 2,441 3,242 32.8%
Net profit margin (%) 11.9% 16.8%   11.4% 12.6%  
No. of shares       197.9 197.9  
Diluted earnings per share (Rs)*         34.9  
P/E ratio (x)*         16.9  
* On a trailing 12-months basis

Performance summary
What is the company’s business? Tata Power (TPC) is the largest private player in the power sector with a generation capacity of 2,324 MW, which is around 19% of the total power generation capacity of the private sector in India and a mere 2% of the country’s total capacity. Out of this installed capacity, around 80% is used for supplying electricity to the Mumbai region. Apart from power generation, the company also has interests in areas like transmission and distribution and power trading.

What has driven performance in 2QFY07?
Better realisations, higher volumes aid topline: The 14% YoY growth in Tata Power’s topline during 2QFY07 has been due to the company selling more volumes and earning higher rate per unit sold from customers. While volume sales grew by 6% YoY, per unit realisations were up 12% YoY. The company generated 3,522 m units (MUs) during 2QFY07, 3% YoY higher than the generation in 2QFY06. This was made possible by higher generation from the company’s hydro plants, which benefited from the good monsoons in Maharashtra earlier this year. As for the current expansion, the company has indicated that the 250 MW coal based plant and 100 MW diesel-generating sets are progressing well towards adding up to the supply of electricity to the Mumbai region. Tata Power has also commenced work on a 120 MW met coke project in Haldia (West Bengal), 100 MW wind power project in Maharashtra and 1,000 MW Maithon project (joint venture with Damodar Valley Corporation).

Higher fuel and purchase costs impact margins: Despite the decent growth in generation and sales, Tata Power’s operating margins contracted by 200 basis points (2%) during 2QFY07. This was on the back of the company paying higher unit cost for external power purchases. Investors must note that apart from utilising own generation, Tata Power purchases electricity (624 MW in FY06) from sources like MSEB, Jindal Power and Tata Power Trading Company. Power purchase costs increased from 12.7% of sales in 2QFY06 to 14.4% in 2QFY07.

Margins were also impacted due to higher fuel costs, which increased from 48.4% of sales in 2QFY06 to 51% in 2QFY07. The overall rise in fuel costs, and consequently the fall in margins, has been curtailed due to higher generation from the company’s hydro plants (as indicated above).

Tax write-backs aid bottomline: Despite the contraction in operating margins, Tata Power’s net margins witnessed a strong expansion of 490 basis points (4.9%), aided by higher other income, lower interest costs and tax write-backs (to the tune of Rs 312 m). We have not factored in these write-backs in our estimates and, to that extent, there exists an upside to our FY07 profit estimates for the company.

What to expect?
At the current price of Rs 590, the stock is trading at 13.3 times our estimated FY09 earnings and 1.9 times estimated FY09 book value. Factors like higher operational capacity and better utilisation have visibly impacted the company’s topline during the first half of this fiscal. However, higher fuel cost and cost of external purchases is what shall continue to pinch the company’s performance in the future. We have factored these higher costs in our numbers and to that extent will maintain our operating performance estimates for the company for future years. Overall, we are positive on Tata Power from a long-term perspective considering that the company is gradually adding up generation capacities, even though in a piecemeal manner.

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