Tata Power: Tripping over

Rising staff costs and other expenditure mar Tata Power numbers

Tata Power's September 2006 quarter results have been affected by rising operational costs. Operating profit has grown a mere 3.75 per cent y-o-y to Rs 249.5 crore in Q2 FY07 compared with 13.7 per cent growth in revenues to Rs 1200.8 crore. Operating profit margin also fell 190 basis points y-o-y to 20.8 per cent in the last quarter.

However, buoyant sentiment on the street helped the stock gain 2.4 per cent to Rs 590.5 on Monday. Earlier, Reliance Energy had seen its operating profit margin dip by 650 basis points y-o-y to 12.6 per cent in the last quarter, owing to an increase in cost of materials and sub-contract charges for its EPC and contracts division.

Tata Power sold 35.45 billion units in Q2 FY07, a growth of 6.1 per cent y-o-y and that was largely owing to enhanced output from Jojobera thermal power station.

Realisations were estimated at Rs 3.29 per unit in the September 2006 quarter compared with Rs 2.9 a year earlier, given rising fuel costs.

The cost of power purchased rose 29.3 per cent y-o-y to Rs 172.3 crore in the last quarter, coupled with the cost of fuel jumping 20 per cent to Rs 612 crore.

Earlier, Reliance Energy's realisations per unit were more or less flat at Rs 4.2 in the last quarter. Tata Power also had to grapple with staff costs rising 41 per cent y-o-y to Rs 59.9 crore in the last quarter, along with its other expenditure increasing 47.3 per cent, which put pressure on operating margins.

Tata Power has filed an appeal relating to MERC's order of October 3, 2006, concerning annual revenue requirement for FY05, FY06 and FY07.

In addition, it has signed several agreements relating to expansion in its generating capacity, including that of a joint venture with Tata Steel to set up captive power plants at the steel maker's facilities.

However, the stock trades at an expensive 20 times estimated FY07 earnings, given its holdings in the group's telecom companies.

i-flex: Flat offer

In spite of lofty valuations, Oracle's open offer for i-flex is unlikely to evince much interest from investors unless the stock falls next month. With Oracle's offer of Rs 1,475 ""a discount of about 10 per cent to the market price-shareholders are likely to be better off exiting through the market.

Oracle announced its open offer for a 20 per cent stake in i-flex in September, which was a 3 per cent premium to the then market price.

Since then, the stock price has appreciated further. Even last year, Oracle had not managed to find takers, and it raised its stake in i-flex mainly through open market purchases.

The current open offer has been triggered as Oracle's stake in i-flex has gone up from 52.5 per cent to 55.1 per cent. Oracle invested Rs 581 crore for the additional stake, which i-flex needed to buy Mantas.

Meanwhile, in the September 2006 quarter, i-flex's total income went up 22.9 per cent q-o-q, helped by a 29.5 per cent growth in product revenues. Services revenues also went up an impressive 16.9 per cent sequentially.

Operating profit went up a huge 170 per cent, with good growth in both products and services. As a result, operating profit margin improved from 7.31 per cent in Q1 to 16.06 in Q2.

However, the June quarter is usually slack for software firms and the weakness in i-flex's performance was owing to lower booking of licence fee revenues and a wage hike.

During the quarter, it acquired US-based Mantas, which will add anti-money laundering and compliance software and services to the i-flex portfolio. In its products business, it acquired 14 new clients and new product sales stood at $16 million in Q2, $4 million higher than the previous quarter.

In services, the growth was propelled by non-Citigroup customers, which grew 24 per cent, while Citigroup revenues rose 10 per cent.

With pending orders of $67.5 million, the product business is doing well. As more sales are recognised, the profitability will improve.

In services, its reliance on Citigroup has reduced from 54 per cent of segment revenues to 51 per cent, and the margins have risen to 17.7 per cent from 11.8 per cent in June quarter.

However, in terms of valuation, the i-flex stock trades at an expensive P/E of 39 times estimated FY07 earnings and 30 times FY08 earnings.