Stock Review: TATA Power

TATA Power could not repeat its March quarter performance as net profit skidded in the June 2010 quarter, while sales grew marginally. The latest results imply significant pressure on its near-term performance unless the company improves the capacity utilisation of its power plants.

   The current year will also test its execution ability since the company targets to commission projects with total capacities double of what it has commissioned in the past two years. Barring the near term uncertainties, the company's medium and long-term outlook remains robust.

   While the company managed a marginal growth of 7% in sales on consolidated basis, net profit fell by as much as 45% during the June quarter. Net profit is nearly one-third of that recorded during March 2010 quarter, on nearly the same level of sales. While a foreign exchange loss of more than Rs 150 crore has had a marginal effect on the bottom line, the major impact is on account of considerable increase in almost all cost items, especially the cost of fuel and power.

   Nearly two-thirds of the net profit decline can be attributed to the increase in core costs. Though this itself is a cause of worry, the bigger worry is the fact that power generation has increased only marginally. This means that even though sales dropped, its fixed costs did not. This is because the company commissioned a number of power projects during FY10, increasing its capacity by about 200 mw. Falling revenue on higher fixed costs means pressure on profitability of the company.

   Tata Power is undertaking significant capacity addition to nearly triple its capacity by the end of FY13 to 8,400 mw. This will additionally require about Rs 18,000 crore during the period. It had earlier bought stake in coal mining resources. It had sold a small part of its equity for Rs 1,400 crore last month to reduce the debt burden, a part of which was due immediately.

   Though funding is not a problem for the expansion program, given the reasonable level of cash generation, there are significant execution challenges. These include securing and ensuring adequate coal supplies, failing which it will have to depend upon costly oil, and close co-ordination for almost 8-10 different units of plants across locations. All this may pose delay in the commissioning.