Tata Power: High voltage

The utility plans to increase capacity six-fold by 2013 to around 12,800 mw.

The Tata Power stock rose 3.6 per cent on Friday to Rs 1211, even as the management outlined its plans for the future in a presentation on Thursday. India's biggest integrated private sector utility has chalked out a strategy which entails a presence across generation, transmission, distribution and power trading.

On the generation front, the Rs 4,715 crore company proposes to be an independent power producer, set up ultra mega power plants (UMPPs )and hold generation assets that will be used both for captive purposes and for distribution.

The gameplan is to increase the generation capacity six-fold by 2013 from the current levels of 2,365 mw to about 12860 mw, with most of the addition coming up post 2010. The capacity that can be used for merchant sales would account for a reasonable 12 per cent of the total capacity.

To ensure adequate supplies of coal, a critical input, Tata Power has picked up a 30 per cent stake in a couple of mines of Bumi Resources of Indonesia. It was also recently allotted two coal mines in Jharkhand and Orissa which should support about 800-1000 mw of merchant capacity.

Over the next four years, the company will need to spend Rs 24,000 crore on projects for which Tata Power is already readying the funds. Of this, the larger chunk of Rs 18,000 crore will be mobilised through borrowings.

Internal accruals should fetch the company approximately Rs 3,000 crore and an issue of preferential shares or warrants to promoters another Rs 2,000 crore or so.

The balance is expected to be met through the sales of investments and perhaps an issue of shares. In fact, the company has sold some investments including a small stake in Tata Teleservices.

Tata Power is expected to close FY08 with revenues of Rs 5,200 crore and a net profit of about Rs 600 crore. Revenues for FY09 are estimated at Rs 5,500 crore while net profits could be in the region of Rs 710 crore.

While the company's equity will get diluted by about 15 per cent as the company mobilises resources by issuing new shares, the earnings could nonetheless grow at around 14-15 per cent over the next few years, say analysts. If coal prices stay firm or rise, the earnings stand to get a boost because of the company's stakes in coal mines.

At Rs 1211, the stock trades at just under 40 times FY09 estimated earnings which may appear rather expensive. However, the company's investments in group firms such as TCS, Tata Communications, Tata Teleservices and so on should be taken into account as also the value of the stake in the Bumi coal mines and the value of the distribution business in New Delhi. Together all these have been valued by analysts at around Rs 900-1000 per share.

That leaves an implied price of about Rs 211-311 per share for the core power generation business, which is getting a discounting of around 7-10 times. Given the shortage of power, power stocks should get good valuations over the next few years.