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ICICI pick of the week (Tata Power Company Ltd.)
Saturday, April 7, 2007
Tata Power Company Ltd.
Background
Tata Power Company is India ’s largest private sector electricity generating company with an installed generation capacity of over 2300 MW. The company has a presence in all areas of power sector generation (thermal, hydro, solar and wind), transmission and distribution. Its thermal power stations are located at Trombay in Mumbai, Jojobera in Jharkhand and Belgaum in Karnataka. The hydro stations are located in the Western Ghats of Maharashtra and the wind farm in Ahmednagar. An optimum mix of hydel and thermal capacity enables the company to supply power at competitive tariffs to its customers. Among its achievements, the company has to its credit the installation of India’s first 500 MW unit at Trombay, the first 150 MW pumped storage unit at Bhira, and a flue gas desulphurization plant for pollution control at Trombay.
Investment Rationale
Power sector on cusp of huge growth
Although power generation capacity has increased substantially in recent years, it has not kept pace with the growth in demand or the growth of the economy generally. India ’s electricity consumption is amongst the lowest in the world at 569 units per capita in 2006. This contrasts with 1,484 units per capita in China , 2183 units in Brazil and 13,456 units in the US .
To boost generation, the government has unveiled a plan to set up five ultra mega power projects of 4,000 MW each. Further, it has allotted 26 coal blocks with reserves of 8,581 million tonnes and four lignite blocks with reserves of 755 million tonnes have been allotted to power producers. This is likely to improve fuel supply for the industry.
Ultra mega power project, partnerships to boost earnings
Tata Power has bagged the bid for the ultra mega power project at Mundra ( Gujarat ). It also has successful public-private partnerships in generation, transmission and distribution – North Delhi Power Ltd with Delhi Vidyut Board for distribution in North Delhi, Powerlinks Transmission with Power Grid Corporation for evacuation of Power from Tala hydro project in Bhutan to Delhi and Maithon Power with Damodar Valley Corporation for a 1000 MW Mega Power Project.
Revenues from Tala project to accrue from FY07
In a ‘first of its kind’ project, the company has entered into a 51:49 joint venture with PowerGrid Corporation of India for the 1200-km Tala transmission project. The joint venture is India’s first transmission project to be executed with private/public partnership. This project is expected to help evacuate power from the India-Bhutan joint venture (Tala power project). Even though the project is complete, there are some issues on power evacuation from the plant site as eastern and northern regions transmission lines are out of service and need repair. We expect revenues to accrue to Tata Power from FY07 onwards.
Expansion plans to drive future growth …
The company has drawn up an aggressive plan to augment generation capacity to over 4,500 MW at a capex of Rs 18,000 crore. Apart from the Mundra ultra mega power project, other projects include the 120 MW Jojobera expansion project and 250 MW expansion project at Trombay. It is also in the process of installing 100 MW low capital cost diesel-generating sets, which have a short commissioning period.
… and progress will be the key value driver
Tata Power has begun working (financial closure done and construction about to begin) on 590 MW of generation expansion projects that are likely to come through by FY09. Further, there is another 4,000 MW of ‘announced’ projects on which work would commence soon, apart from other ultra mega power projects which it is bidding for. The company has an impressive and efficient project implementation track record and progress on these projects will be the key growth driver.
Strategic defense business potential
The strategic electronics division has an order book of Rs 200 crore as against FY06 revenue of Rs 38.2 crore, giving an order-book to sales ratio of 5.2x, implying huge revenue visibility ahead. The division caters to electronic equipment related orders from the Ministry of Defense and with the government boosting spending on security, the company is expected to be a major beneficiary.
Stake in Indonesian coal companies
In a bid to secure fuel supplies, the company has acquired 30% equity stakes in two major Indonesian thermal coal producers, PT Kaltim Prima Coal and PT Arutmin Indonesia. As part of the arrangement, it has signed an off-take agreement with the latter, which entitles it to purchase about 10 million tonnes of coal per annum. This move will support Tata Power’s upcoming power projects on the west coast of India comprising 7,000 MW to be developed over the next 5 years.
Financials:
For the nine months ended December 2006, Tata Power’s revenue grew by 13% to Rs 3,812.91 crore (after adjusting reversal of provision earlier year for levy of sales tax on fuel oil.). The average tariff for the period works out to Rs 3.39/unit, up by 9%. Sales volume has increased by 7% to 11,007 MU and generation by 5% at 10,933 MU compared to the corresponding period last year.
As a percentage of sales, the cost of power purchased and cost of components material and service has declined to 12.31% and 1.48% respectively (13.46% and 5.01% in corresponding period last year). However as a percentage of sales staff cost, fuel cost and other expenses have increased to 4.11%, 57.2% and 6.06% respectively. (Last year: 3.72%, 52.33% and 5.57%). As a result operating profit margin have declined by 110 basis points to 18.8%. Nevertheless, benefit of revenue growth has percolated to profitability and as a result operating profit of the company have reported a growth of 7% to Rs 718.39 crore.
Valuations
We expect sales to grow from Rs 5,740 crore in FY06 to Rs 7,890 crore in FY08E. Net profit is expected to rise from Rs 637 crore to Rs 790 crore. We expect the company to earn a RoE of 14% on its investments in the Mundra ultra mega power project assuming a 70:30 debt-equity mix. We estimate FY08E EPS at Rs 40.10 and set a price target of Rs 610. At this price, the stock will trade at P/E of 15.21x, giving an upside potential of 22% from the current price of Rs 501 within a 12-15 month time horizon.
Technical Outlook
The stock has corrected from the highs of Rs 640 to Rs 480. It has found strong supports at Rs 500 and currently consodating in a range of Rs 480 to Rs 530. The RSI Indicator remains oversold, which makes accumulation attractive. The short-term resistance remains at Rs 530, above which the scrip may rally to Rs 600.
Download Full Report HERE
Background
Tata Power Company is India ’s largest private sector electricity generating company with an installed generation capacity of over 2300 MW. The company has a presence in all areas of power sector generation (thermal, hydro, solar and wind), transmission and distribution. Its thermal power stations are located at Trombay in Mumbai, Jojobera in Jharkhand and Belgaum in Karnataka. The hydro stations are located in the Western Ghats of Maharashtra and the wind farm in Ahmednagar. An optimum mix of hydel and thermal capacity enables the company to supply power at competitive tariffs to its customers. Among its achievements, the company has to its credit the installation of India’s first 500 MW unit at Trombay, the first 150 MW pumped storage unit at Bhira, and a flue gas desulphurization plant for pollution control at Trombay.
Investment Rationale
Power sector on cusp of huge growth
Although power generation capacity has increased substantially in recent years, it has not kept pace with the growth in demand or the growth of the economy generally. India ’s electricity consumption is amongst the lowest in the world at 569 units per capita in 2006. This contrasts with 1,484 units per capita in China , 2183 units in Brazil and 13,456 units in the US .
To boost generation, the government has unveiled a plan to set up five ultra mega power projects of 4,000 MW each. Further, it has allotted 26 coal blocks with reserves of 8,581 million tonnes and four lignite blocks with reserves of 755 million tonnes have been allotted to power producers. This is likely to improve fuel supply for the industry.
Ultra mega power project, partnerships to boost earnings
Tata Power has bagged the bid for the ultra mega power project at Mundra ( Gujarat ). It also has successful public-private partnerships in generation, transmission and distribution – North Delhi Power Ltd with Delhi Vidyut Board for distribution in North Delhi, Powerlinks Transmission with Power Grid Corporation for evacuation of Power from Tala hydro project in Bhutan to Delhi and Maithon Power with Damodar Valley Corporation for a 1000 MW Mega Power Project.
Revenues from Tala project to accrue from FY07
In a ‘first of its kind’ project, the company has entered into a 51:49 joint venture with PowerGrid Corporation of India for the 1200-km Tala transmission project. The joint venture is India’s first transmission project to be executed with private/public partnership. This project is expected to help evacuate power from the India-Bhutan joint venture (Tala power project). Even though the project is complete, there are some issues on power evacuation from the plant site as eastern and northern regions transmission lines are out of service and need repair. We expect revenues to accrue to Tata Power from FY07 onwards.
Expansion plans to drive future growth …
The company has drawn up an aggressive plan to augment generation capacity to over 4,500 MW at a capex of Rs 18,000 crore. Apart from the Mundra ultra mega power project, other projects include the 120 MW Jojobera expansion project and 250 MW expansion project at Trombay. It is also in the process of installing 100 MW low capital cost diesel-generating sets, which have a short commissioning period.
… and progress will be the key value driver
Tata Power has begun working (financial closure done and construction about to begin) on 590 MW of generation expansion projects that are likely to come through by FY09. Further, there is another 4,000 MW of ‘announced’ projects on which work would commence soon, apart from other ultra mega power projects which it is bidding for. The company has an impressive and efficient project implementation track record and progress on these projects will be the key growth driver.
Strategic defense business potential
The strategic electronics division has an order book of Rs 200 crore as against FY06 revenue of Rs 38.2 crore, giving an order-book to sales ratio of 5.2x, implying huge revenue visibility ahead. The division caters to electronic equipment related orders from the Ministry of Defense and with the government boosting spending on security, the company is expected to be a major beneficiary.
Stake in Indonesian coal companies
In a bid to secure fuel supplies, the company has acquired 30% equity stakes in two major Indonesian thermal coal producers, PT Kaltim Prima Coal and PT Arutmin Indonesia. As part of the arrangement, it has signed an off-take agreement with the latter, which entitles it to purchase about 10 million tonnes of coal per annum. This move will support Tata Power’s upcoming power projects on the west coast of India comprising 7,000 MW to be developed over the next 5 years.
Financials:
For the nine months ended December 2006, Tata Power’s revenue grew by 13% to Rs 3,812.91 crore (after adjusting reversal of provision earlier year for levy of sales tax on fuel oil.). The average tariff for the period works out to Rs 3.39/unit, up by 9%. Sales volume has increased by 7% to 11,007 MU and generation by 5% at 10,933 MU compared to the corresponding period last year.
As a percentage of sales, the cost of power purchased and cost of components material and service has declined to 12.31% and 1.48% respectively (13.46% and 5.01% in corresponding period last year). However as a percentage of sales staff cost, fuel cost and other expenses have increased to 4.11%, 57.2% and 6.06% respectively. (Last year: 3.72%, 52.33% and 5.57%). As a result operating profit margin have declined by 110 basis points to 18.8%. Nevertheless, benefit of revenue growth has percolated to profitability and as a result operating profit of the company have reported a growth of 7% to Rs 718.39 crore.
Valuations
We expect sales to grow from Rs 5,740 crore in FY06 to Rs 7,890 crore in FY08E. Net profit is expected to rise from Rs 637 crore to Rs 790 crore. We expect the company to earn a RoE of 14% on its investments in the Mundra ultra mega power project assuming a 70:30 debt-equity mix. We estimate FY08E EPS at Rs 40.10 and set a price target of Rs 610. At this price, the stock will trade at P/E of 15.21x, giving an upside potential of 22% from the current price of Rs 501 within a 12-15 month time horizon.
Technical Outlook
The stock has corrected from the highs of Rs 640 to Rs 480. It has found strong supports at Rs 500 and currently consodating in a range of Rs 480 to Rs 530. The RSI Indicator remains oversold, which makes accumulation attractive. The short-term resistance remains at Rs 530, above which the scrip may rally to Rs 600.
Download Full Report HERE
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IMPORTANT DISCLAIMER
Investment in equity shares has its own risks. Sincere efforts have been made to present the right investment perspective.The information contained herein is based on analysis and up on sources that we consider reliable. I, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and I am not responsible for any loss incurred based upon it.& take no responsibility whatsoever for any financial profits or loss which may arise from the recommendations given in this blog.
