Tata Power: Tripping over

Higher fuel costs hit Tata Power operating profit margins

Tata Power has reported a 9.3 per cent y-o-y growth in its overall operating profit to Rs 240.32 crore in the September quarter.

However, in July 04, the company had sold its power plant at Wadi and its broadband division and, hence, the results of the last quarter are not strictly comparable with the corresponding quarter of the previous year.

Nevertheless, higher input costs such as fuel has resulted in operating profit margins shrinking by almost 75 basis points to 22.63 per cent in the previous quarter.

The company's sales of electricity has grown almost 10.4 per cent y-o-y to 3341 million units in the last quarter. That was largely owing to improved plant load factor at its Trombay plant.

Realisations of the company were more or less flat at Rs 2.95 per unit in Q2 FY 06. Like earlier quarters, players in this sector such as Tata Power have been grappling with higher input costs, especially coal.

As a result, the company's cost of fuel has grown almost 18.15 per cent on a y-o-y basis in the September quarter. The fuel cost accounts for the largest chunk of the company's expenses and this cost as a percentage of revenue from power supply, had jumped almost 329 basis points to 52.1 per cent in the last quarter.

Going forward, earnings momentum is expected to be provided via its recently completed 120 mw capacity at Jojobera. The street, however, appears to have factored in the growth opportunities for the company, with the stock trading at almost 18.8 times estimated FY 06 earnings.

Bharat Forge

In terms of capacity expansion, Bharat Forge is evidently on the fast track. During the quarter, it increased its domestic forging capacity from 1,30,000 tonne to 2,00,000 tonne.

What's more, its global forging capacity increased by another 1,60,000 tonne, thanks to acquisitions of Federal Forge in the US and the Imatra Forging Group in Sweden.

Even excluding the capacity addition because of Imatra, which was acquired towards the end of the September quarter, Bharat Forge's capacity has increased by 56.5 per cent in the September quarter.

The pace at which its global revenues grew, however, remained at about 45 per cent, the same as in the June quarter. Excluding the impact of the Federal Forge acquisition, revenue growth would fall to just 34 per cent. But it's not so much the revenue growth numbers that are worrying.

After all, it would be a while before the newly added capacity will be utilised fully, after the mandatory validation process done by clients and the ensuing ramp up.

The problem is, revenue growth is not entirely trickling down to the bottomline. For instance, consolidated revenues grew 44.8 per cent last quarter, but net profit rose just 31.3 per cent.

Worse still, equity dilution of about 11 per cent (thanks to the company's extensive fund raising) meant that earnings per share (which is what ultimately matters for a shareholder) grew just 18.2 per cent. For a stock that's trading at about 28 times forward earnings, growth needs to pick up fast.

That would be difficult in the near term since its recent acquisitions have single digit net profit margins, much lower than the 13 per cent odd margins the Indian business enjoys. It would be while before Bharat Forge is able to increase margins of these businesses.

Crompton Greaves

The key takeaway from Crompton Greaves' September quarter result is that a larger turnover coupled with lower input costs have started showing signs of yielding improved operating profit margins for capital good firms.

The company's operating margins have grown about 77 basis points (one basis point is one hundredth of a percentage point) to 8.73 per cent in the September quarter. Meanwhile, raw materials as a percentage of income from operations have remained more or less steady at 63.61 per cent.

Analysts highlight that players in the capital goods sector like Crompton Greaves have entered into long-term steel contracts and it limits the company's ability to fully leverage the recent dip in spot steel prices.

The company has reported a 56.25 per cent growth in earnings before tax and exceptional items to Rs 43.11 crore in the last quarter, despite income from operations growing only 22.2 per cent.

Apart from the improvement in margins, profit growth was also aided by other income expanding almost 82.6 per cent to Rs 6.52 crore and that was largely owing to higher treasury income.

With the capex cycle expected to remain strong in the medium term, it should provide growth stimulus to the company. However, the street appears to have factored in the growth prospects with the stock trading at almost 15.6 estimated FY06 earnings.

Contributions from Amriteshwar Mathur