Tata Power: Geared for growth

Two big projects, more merchant sales and a less-leveraged balance sheet will drive growth.

Tata Power managed to sell 4,180 million units of power in the June 2009 quarter, 2 per cent more than it did in the corresponding period of the previous year. But lower revenues (down 14 per cent) and a couple of one-time expenses left the profit before tax at Rs 254 crore and the net profit before exceptionals at Rs 204 crore. The Street was a tad disappointed with sales of units — the Mumbai licence area didn’t perform as well as expected. However, generation should start stabilising with Jojobera, Haldia and Trombay units having been commissioned.

Power revenues were lower during the quarter because power purchase costs (a pass-through item in tariffs) came off sharply and pulled down the total revenue to Rs 1,743 crore. This time around, Tata Power’s own units contributed more to the total generation. Besides, the raw materials bill was smaller due to the sharp fall in imported coal prices.

The operating profit of Rs 360 crore would have been higher had it not been for some one-times expenses at two of the power plants and at the strategic electronics division. Adding to the company’s expenses were higher interest payments, amounting to just over Rs 100 crore. Despite higher other income, the profit before exceptionals was Rs 185 crore, just about 3.3 per cent higher than for the corresponding quarter of the previous year. Reported profits were higher because the company accounted for revenues of Rs 232 crore relating to previous periods after receiving permissions from MERC (Maharashtra Electricity Regulatory Commission). During the quarter, merchant sales accounted for 5 per cent of sales, but this should increase in the next few quarters. Tata Power’s Rs 1,650-crore GDR issue last month should bring down interest costs and strengthen the balance sheet.

Meanwhile, the company’s 4,000-Mw Mundra ultra mega power project is on track with the first 800-Mw unit scheduled to be commissioned in September 2011. The other large project, a 1,050-Mw thermal power project, that Tata Power is implementing in partnership with Damodar Valley Corporation, has also achieved financial closure and is on schedule. Analysts attribute a sum-of-the-parts valuation to the stock of Rs 1,250 per share.