RESULTS REVIEW Share Data Market Cap Rs. 239.30 bn Price Rs. 1080.50 BSE Sensex 13,769.15 Reuters TTPW.BO Bloomberg TPWR IN Avg. Volume (52 Week) 0.17 mn 52-Week High/Low Rs.1230 / 530.10 Shares Outstanding 221.44 mn Valuation Ratios Year to 31 March 2010E 2011E EPS (Rs.) 64.4 73.7 +/- (%) 12.8% 14.5% PER (x) 16.8x 14.7x EV/ Sales (x) 1.8x 1.6x EV/ EBITDA (x) 9.1x 8.0x Shareholding Pattern (%) Promoters 33 FIIs 19 Institutions 29 Public & Others 19 Relative Performance 1400 1150 900 650 400 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 TPC Rebased BSE Index Tata Power Stock price discounts the medium term growth Tata Power Company delivered a solid set of numbers on the back of strong performance in the coal business. Consolidated net profit increased 27% y-o-y to Rs. 12.64bn. The company added generation capacity of 421 MW during the year and its capacity expansion projects remain on track or ahead of schedule. However, the stock has increased significantly since our last update and, in our view, now fully discounts most of the upside embedded in the projects under implementation. Consequently, we have downgraded the stock from Buy to Hold. Capacity expansion well on track During the year TPC s installed capacity increased 421 MW to 2,785 MW. Moverover, the capacity expansion program remains well on track. The Mundra project is now more than 23% complete and has been awarded contracts by PGCIL for new lines as well as for strengthening existing lines. Work on Maithon proect is in progress as per schedule and PPAs have been signed with DVC, NDPL, WBSEB and PSEB. Haldia s first two units (45 MW each) have been commisioned and the third unit is expected to be operational soon. As generation from the Haldia project stabilises, we expect the contribution of merchant sales to increase. But funding the expansion will lead in equity dilution As per the management, over the next three years, TPC would require equity infusion of about Rs. 55bn to fund the capacity expansion projects. Of this, approximately Rs. 28bn can be funded through internal accruals. For the remaining amount, company would need to either sell its nonstrategic investments or raise additional equity capital through equity dilution at the parent or subsidiary level. Key Figures (Standalone) Quarterly Data Q4'08 Q3'09 Q4'09 QoQ% YoY% (Figures in Rs. mn, except per share data) Net Sales 16,345 17,769 14,744 (17.0)% (9.8)% EBITDA 1,522 2,560 2,934 14.6% 92.8% Adj. Net Profit 1,664 1,151 4,369 279.7% 162.6% Margins(%) EBITDA 9.3% 14.4% 19.9% NPM 10.2% 6.5% 29.6% Hold Per Share Data (Rs.) Adjusted EPS 7.5 5.2 19.7 279.2% 164.5% Please see the end of the report for disclaimer and disclosures. -1-
We believe that the company will be able to sell roughly Rs. 8bn through the sale of non-strategic investments; the remaining amount will require equity dilution, which at current stock prices, would necessitate an equity dilution of roughly 10% at the parent level. In our valuation, we have baked in this dilution and have consequently added the embedded value of the capacity expansion projects currently in hand. Coal business likely to remain subdued in the medium term In FY09, the Coal segment's strong performance was the major reason for the 61% jump in Tata Power's total income. However, given the sharp correction in coal prices, we expect revenues from this business to fall by ~20% in FY10. In recognition of the changed dynamics of the coal business, the Company also recognised a goodwill impairment loss of Rs. 2.8bn relating to its investments in coal companies - KPC and Arutmin. Valuation Our SOTP based valuation indicates a fair value of Rs. 1,163.6 for Tata Power, indicating an upside of 7.7% over the CMP of Rs. 1080.5. We believe that the current price largely discounts the near-to-medium term growth potential, and thus downgrade the stock from Buy to Hold. SOTP Business Value per share Commissioned power generation projects 364.1 License Area Distribution Assets: 48.5 Coal Mines in Indonesia: 125.1 NDPL 26.4 Powerlinks 3.5 Tata Power Trading 4.5 Strategic Elec Division 12.7 Tata BP Solar 61.0 NELCO 2.3 Investments 81.0 Projects in hand 434.5 Total 1,163.6 Source: Company Data, Indiabulls Estimates Please see the end of the report for disclaimer and disclosures. -2-
Generation assets are valued at Rs. 364 per share: Mumbai License Area contributes Rs. 230 per share (P/B 2.3x), Merchant Power Generation projects are valued at Rs. 36 per share (P/B 3.5x); other generation projects are valued at Rs. 98 per share (P/B 2.3x). Indonesian coal mines are valued at Rs. 125 per share based on acquisition value of USD 1.1bn less outstanding loans of USD 764mn less impairment loss recognized in 2008-09 and a target P/B of 2.3x. Investments are valued at Rs. 81 per share: This comprises of listed investments valued at current market price (Rs. 67.9 per share) and unquoted investments valued at book (Rs. 13.1 per share). Other businesses are valued at Rs. 159 per share: (a) NDPL, Powerlinks, and License area distribution assets are valued at P/B multiple of 2.3x based on 2008 equity, (b) TPC s stake in Nelco is valued at current market price, (c) TPTC at P/E multiple of 25x, (d) SED at P/Sales multiple of 3x and (e) TPC s 49% stake in Tata BP Solar is valued at 3.5x sales based on 2008 revenue. Value of projects in hand is valued at Rs. 435 per share: TPC is currently executing projects (primarily Mundra and Maithon) which will require funding of Rs. 236bn over the next three years. Of this equity component is Rs. 55bn. We have valued this to-be-injected-equity at 2.3x and have discounted it at 16% to reflect the value of projects in hand. Result Highlights (Annual Consolidated) Revenues, COGS, and gross profit margin Tata Power's total income jumped 61% y-o-y to Rs. 175.9bn. This hike is attributable to the strong performance of coal businesses and commissioning of Haldia and the Wind projects. Additionally, the Company now treats NDPL as a subsidiary vis-à-vis a joint venture; this has helped boost its top-line. However, coal processing charges, cost of fuel, and cost of power for FY09 rose 64.3% y-o-y to Rs. 116.9bn, resulting in a gross profit of Rs. 58.9bn. The gross profit margin declined 120 bps to 33.5%. We expect revenues to grow ~3% in FY10 and ~15% in FY11. Please see the end of the report for disclaimer and disclosures. -3-
SGA & other expenses, other income, and EBIT: Selling, general, administration and other expenses increased significantly to Rs. 26.3bn, up 59% y-o-y. The increase is due to the addition of NDPL as a subsidiary and the commissioning of Haldia and the Wind projects. Other Income stood at Rs 5.6bn compared to Rs 5.2bn in FY08. With depreciation and amortization of Rs. 6.6bn, EBIT for FY09 stood at Rs. 26.1bn. Net Profit: Tata Power's net profit stood at Rs. 12.6bn for FY09, 26.8% higher over last year. The net income margin dropped from 9.1% in FY08 to 7.2% in FY09. Key Figures (Consolidated) Year to March FY08 FY09 FY10E FY11E CAGR(%) (Figures in Rs. m, except per share data) (FY09-11E) Net Sales 108,909 175,875 180,272 206,412 8.3% EBITDA 21,221 32,651 35,647 40,816 11.8% Net Profit 9,965 12,640 14,254 16,321 13.6% Margins(%) EBITDA 19.5% 18.6% 19.8% 19.8% NPM 9.1% 7.2% 7.9% 7.9% Per Share Data (Rs.) Normalized EPS 47.1 57.1 64 74 13.6% PER (x) 23.0x 18.9x 16.8x 14.7x Please see the end of the report for disclaimer and disclosures. -4-
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