The Tata Power stock corrected 5.3 per cent on Tuesday as investors turned nervous ahead of its results for the period ended March 2012. With the results coming in below expectations largely due to one-off items, on Wednesday, the stock fell further by as much as five per cent intra-day and closed with a net decline of 2.3 per cent.
Though top line growth was robust for the quarter and year ended March 2012, higher overhead costs, impairment provision for Mundra and forex losses took a toll on its performance at the operating and net levels. This has led analysts to cut their earnings estimates for FY13 and FY14 in the range of 11-13 per cent and eight to nine per cent, respectively.
Despite this, analysts are positive on the stock, albeit with some caution. While the company’s regulated business model, low exposure to volatile merchant power and robust long-term prospects of coal mining business are positives, the cautious stance is consequent to lack of clarity over the Mundra issue and slow ramp-up in production at its Indonesia mines.
While the first issue is partly resolved due to the company’s efforts of blending low-grade coal to bring down losses at Mundra, the latter needs to be monitored. Given the various businesses of Tata Power and their prospects, analysts have pegged their fair value (average) for the stock at Rs 115, indicating that there is upside potential of 30 per cent from the current levels of Rs 88.4.
| OPERATIONAL GAINS IN FY13 | |||
| In Rs cr | Q4’ FY12 | FY12 | FY13E |
| Revenues | 7,235 | 26,001 | 29,002 |
| % change y-o-y | 44.3 | 33.7 | 11.5 |
| Operating profit | 1,460 | 5,325 | 6,552 |
| % change y-o-y | 21.1 | 17.4 | 23 |
| Adjusted net profit | 352 | 1,137 | 1,899 |
| % change y-o-y | -36.0 | -40.0 | 67.0 |
| E: Estimates; Consolidated financials Source: Company, Analyst reports | |||
Performance marred by forex loss
Robust growth in consolidated revenues for the March 2012 quarter was led by strong growth in standalone operations (35 per cent rise in revenues), impressive performance of the coal mining business (12.5 per cent year-on-year growth in volumes, six per cent rise in realisation) and Delhi distribution operations (revenue up 30 per cent).
Operating profit, however, grew just 21 per cent, led by standalone business (higher overheads, less capacity available under merchant power and lower merchant realisations) and higher deferred stripping costs of coal mines. Further, impairment provision at Mundra (Rs 815 crore) and forex loss (Rs 166 crore) led to a net consolidated loss of Rs 630 crore for the quarter. Adjusting for these exceptional items, the company would have reported a net profit of Rs 352 crore, which is 36 per cent lower compared to the March 2011 quarter.
The company’s Maithon project (Unit 1 of 525 Mw), commissioned in September 2011, stabilised in the March 2012 quarter. This helped earn operating and net profit of Rs 87 crore and Rs 1.3 crore in the March 2012 quarter, compared to losses of Rs 63 crore and Rs 170 crore, respectively, during the nine months ended December 2011. Says Anil Sardana, managing director, Tata Power, “With assured supply, Maithon will show improved performance, going ahead.”
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However, the first unit of its Mundra-based ultra mega power project (UMPP) of 800 Mw, which commenced commercial operations in the March quarter, reported a loss. To curb losses, the company has commenced trials of blending low-grade coal, and initial reports suggest blending up to 50 per cent is feasible. This should help keep a check on losses. The second unit of Maithon and Mundra are expected to be commissioned in the June and September quarters and should add to top line.
Outlook
Though long-term prospects of the company appear good, the medium-term outlook is cautious, primarily due to losses at Mundra and, second, production ramp-up of the coal business happening at a slower-than-expected pace. Says Murtuza Arsiwalla, analyst, Kotak Ins-titutional Equities, in his post-results note, “Potential blending of low grade coal could bring down losses at Mundra, which could be a key upside to our estimate while ramp-up of production at Indonesian coal mines could offset losses at Mundra, besides maximising the benefits of higher coal prices.”
However, this might take time. Says Nalin Bhatt, analyst, Motilal Oswal Securities, in a post-results note, “We see possibility of further earnings cut, primarily arising from coal mining business in terms of higher production cost, lower-than-expected volume growth and further pressure of realisation, owing to softening of coal prices globally.” In the long run, commissioning of 25 Mw solar power, wind power capacity crossing 375 Mw, the South African joint venture (to explore power generation opportunities in South Africa, Botswana and Namibia) emerging as preferred bidder for wind energy projects totalling 234 Mw and satisfactory progress of projects (of about 3,200 Mw in capacity) under construction and development, are positives and provide growth visibility.