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Tata Power: Betting big on expansion

Nov 30, 2011

Tata Power has declared the results for the second quarter of financial year 2011-12 (2QFY12). The company has reported 19% YoY growth in standalone net revenues while net profit has grown by 24% YoY. Here is our analysis of the results.

Performance summary
  • Standalone revenues grow by 19% YoY during 2QFY12, largely due to increase in capacity and improvement in PLF.
  • Standalone operating margins drop to 18% in 2QFY12, from 18.2% in 2QFY11 due to higher cost of power purchased as well as higher cost of fuel (as a percentage of sales).
  • Thanks to higher other income (income from investments), net profits for the quarter and half year period grew 24% YoY and 14% YoY despite lower operating margins.
  • The debt service coverage ratio stood at 3.0 times in 1HFY12 as against 2.5 times in FY11.

Financial performance snapshot
(Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Generation 3,695 3,772 2.1% 8,081 7,661 -5.2%
Sales 3,926 3,793 -3.4% 8,459 7,725 -8.7%
Net revenue 15,708 18,643 18.7% 33,732 37,064 9.9%
Expenditure 12,850 15,290 19.0% 27,021 30,223 11.9%
Operating profit (EBDITA) 2,858 3,353 17.3% 6,711 6,841 1.9%
EBDITA margin (%) 18.2% 18.0%   19.9% 18.5%  
Other income 2,586 4,158 60.8% 4,517 7,426 64.4%
Depreciation 1,327 1,353 2.0% 2,594 2,684 3.5%
Interest 1,084 1,165 7.5% 1,880 2,288 21.7%
Profit before tax 3,033 4,993 64.6% 6,754 9,295 37.6%
Tax 516 1,865 261.4% 1,548 3,349 116.3%
Effective tax rate 17% 37%   23% 36%  
Profit after tax/(loss) 2,517 3,128 24.3% 5,206 5,946 14.2%
Net profit margin (%) 16.0% 16.8%   15.4% 16.0%  
No. of shares (m)         2,373.0  
Diluted earnings per share (Rs)*         4.3  
Price to earnings ratio (x)         21.3  
(* On a trailing 12 months basis)

What has driven performance in 1HFY12?
  • Tata Power saw nearly a 5% YoY decline in its generation of power during 1HFY12 while net sales dropped by 9% YoY in volume terms. The growth in sales revenue from the power business declined was a result of improved realisation per unit on the company's merchant sales. Total generation of power for the half year period was down due to lower generation in Mumbai. This was because of cheaper power being available through purchases. The distribution subsidiary and Joint-Venture with Delhi government, NDPL saw 16% growth in profits with the regulator having hikes tariffs effective September 2011.

  • As for the company's coal mining business, net revenue grew by 38% YoY during the financial year. This was on the back of better realisations even as the company sold lesser coal during the quarter as compared to its volume sales in 1HFY11.

  • Tata Power's standalone operating margins shrunk to 18.5% during 1HFY12, from 19.9% in 1HFY11. This was on account of the rise in power purchase costs. The company also recorded a rise in its other expenses, due to higher coal mining and selling and distribution costs.

  • The retail customer base crossed 2.6 lakh in September 2011.

  • While the Mundra UMPP project was 85% completed, the Maithon project was 95% completed by 1HFY12. Both are scheduled to become operational by FY12-FY13 adding 5,050 MW of capacity out of which power purchase agreements have already been signed for 4,850 MW of capacities.

  • Tata Power plans to transfer at least 75% of the ownership of the investments in the coal companies in Indonesia to its subsidiary Coastal Gujarat Power Ltd (CGPL) to 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.

What to expect?
At the current price of Rs 92, the stock is trading at a multiple of 1.2 times our estimated FY14 book value. Given the timely execution of projects and better visibility on the revenue front we believe that the company will remain at the forefront of power capacity addition in the country. However, the overall concerns over securing fuel supplies at reasonable costs that are clouding the sector prospects cannot be sidelined. Apart from its power generation plans, Tata Power is also progressing steadily in other related areas like power distribution, trading, and coal mining. At the current valuations we maintain our positive view on the stock from a 2-3 years perspective.

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